Editor’s Note: This timeless tip was previously published in our Inbox Coaching.
Many traders and investors are involved in the search for the “Holy Grail” with the goal to find the perfect trading system. Does it really exist? Yes, it does! However, you will not find the right indicator or a long-hidden set of trading rules looking “outside of you.” Van consistently maintained, time and time again, that the real key to trading success is “inside of you.” The systems you are trading (as well as the markets you trade) should really fit you, fit your lifestyle, and fit your beliefs.
But where do you start? What is your way of learning? How will you find out more about markets and systems that will fit you? Reading books and online materials can certainly help and there is a lot of content available on the topic. Workshops from reputable companies can help too by greatly accelerating your learning process. However, my experience has been that traders find the best value at workshops that teach trading systems that work for them—ones that fit them.
Obviously, poorly-performing systems or systems that don’t fit with your beliefs and understandings about markets or trading are a bad investment. Therefore, one of the primary challenges for workshop attendees before registering is to determine if the systems taught at a workshop would be a good investment of their time, effort, and money.
If someone does find a good workshop and systems that fit them, what might that be worth? I have seen workshop attendees who are completely at ease with the systems and can trade them with much success. As you fully learn a system and then let go, you can flawlessly execute the trades in a state of unconscious competence (others like to call this the flow state).
In this article, I would like to give you some things to think about yourself and about the systems you are trading, developing, or just considering.
What Makes Great Systems?
This is not the entire list but here are a few of the most important factors that I believe great systems have in common:
- Great systems are built on a strong foundation of stated beliefs and the respective market edges that are derived from those beliefs. Knowing these factors reinforces your confidence in the system. Confidence is needed little on the “easy” days but more so on the “harder” ones.
- Great systems do not work equally well in all market types. Systems that tend to work in sideways markets may not work well in strong directional markets.
- A great system will fit a particular market or instrument well.
- A great system will have a full set of trading rules and a good record of past live trades in the appropriate market or market conditions.
Examples of Fundamental Beliefs
Below are the beliefs around which I design my trading systems. Do you have a set of your fundamental beliefs written out? Do these beliefs resonate with you?
- Trading/investing based on technical chart analysis and evaluation alone generates (if correctly applied) superior above-average returns. All market information is already included in price so no other sources of information are required.
- Trading/investing with the trend represents a major edge. Trends tend to run further than one might ever expect. Strategies based on trends are to be favored.
- Trading/investing in line with higher timeframes (HT) represents a major edge. Confirmation from HTs allow for an increasing flow of new market entrants in trade direction (tailwind).
- Trading/investing based on leading indicators offers an edge. They reveal ahead of time where support and resistance areas are located therefore price action is likely to develop.
- Price consolidations within a trend are times of pause that are required for the trend to regain strength (“refreshers”) before it can continue. Multi-bar consolidations bring price volatility down and allow for low-risk ideas.
- Market actors leave behind “psychological footprints” in the chart that can be identified as specific price/bar patterns. Understanding the dynamic behind these patterns offers an edge on which systems can be built upon.
- Markets are a reflection of rational human behavior, whether 5-min or monthly chart. This fractal nature of markets is due to humans’ psychological make-up. Until we evolve into a new species, price action will always be the same.
Examples of Systems That Fit a Market
One of my favorite markets to trade is the Forex market. One major aspect of Forex I really value is that trends are easy to find. Trading a trending chart has a big edge for two main reasons. First, trends generate good follow-through. In many instances they go much further than anyone might have expected. Second, entering a trend lowers the probability of getting stopped out on your initial stop.
In general, I like to divide trends up into three simple phases: early trend (with reversals very common), full trend mode and aging trend. I have worked on systems that take advantage of each phase of a trend. One of my systems works well in an aging trend as well as in early trend reversals. My two other main systems get most of their trading opportunities when the trend is in full directional mode. These systems work well together because they complement each other in the different trend phases and as a result, they offer many good trading opportunities every day.
All three systems have a common characteristic that occurs after entry into the trade—an initial spike that is followed by a potential swing move in the trend direction. The initial spike gets the trade into break-even mode very early on. Then, if the follow-through continues to carry the price, the trade is offered the opportunity to generate further follow-through by holding the position as it becomes a longer-term trade.
Because I believe that markets are fractal in nature, all the systems that I have designed can be applied in any time frame from 1-minute charts to monthly charts. Whether you like to trade short-term, invest medium-term or prefer to build long-term positions, the same basic system rules apply (with only slight modifications). Due to the fractal nature of markets, any Forex pair, as well as other highly liquid instruments (such as Indices, Commodities, Bonds and some ETFs), can be traded in a similar way. For example, having available a broad selection of instruments and time-frames allows you to trade indices very short-term (1-min chart), and Forex market on the 15-min chart while stalking a T-Bond entry on the 4-hour time frame. This approach always finds opportunities to trade!
Understanding that the better the fit you have between you, the market and the trading system, makes it easier for you to trade in profitable ways. This is the real key in finding your personal “Holy Grail” system.