Live Trading – Know your system
What are the three components of a Trading System?
First you need to have a crib sheet, always have your concept and your objective and have your objective little bit different for different trading strategies. So don’t confuse them all into one strategy that’s very important. Next that you will have are rules for entry and after that your rules for stop loss. Stop loss rules you can segragate them into Initial stop loss and trailing stop loss and finally then you have target rules. You can further sub-categorize target rules into pre-target rules and intra target rules. You should also have money management rules. What do I mean by that is if there are some kind of price shock in the market what would you do to get out of the market just immediately.
Your pre-target rules needs to be set before you get to the target, or even before you get into the trade you need to know where to look if you need to exit the market and get rid of all the position if there is a very sharp southern reversal from the market. This is just an example of a crib sheet that you can look into.
The next thing that you need is of course your trade journal, which tracks all your trades. Now before we go to the stats what you really need is actually consistent execution, so each trade must be consistently executed and this is why we have the strategy component where we got all the parameters listed down so that we can consistently execute, because every parameter is now quantified, so that we get consistency because if its not quantified you cannot get consistency, your results will become inconsistent. This is why we do that because all the components form the bigger picture of the trading system, which is the strategy component of the crib sheet with your money management rules.
Second thing is your consistent execution, which comes down to your psychology component. This is one of the main things why we actually work on the mind continuously with our Vedanta Elite Traders especially in the morning. We do a 10-15 minutes meditation or you can call it mindfulness which is becoming very popular now. That really gets our mind in tune so that it is in a present moment and there is no skip to the past so in the future we are not grouped by fear and greed. I talked more about this in the Trader’s Essential Kit. There is a very special section just on Trading Psychology alone. That’s the consistent execution part which is connected with your psychology, so work on your mind continuously everyday. The things that we do with our Elite Traders at Master the Markets are just 10 minutes meditation in the morning.
The third thing is stats. As I said previously you need to have a journal to record down every single trade so that you know how the system is performing and your percentage risk that you are taking on each particular trade. With that you will see the reasons why you are getting into them, the date that you entered, the date you exited. Every single trade that we take here at Master the Markets is all locked on and it is fully transparent and this is unique about us, that we are truthful, we are transparent and its all public. You can ask us anytime and we can just give you this transparent record that we have within the front of people as well.
Trading is not just about trading it is not for the day alone, its about taking it for the long run accumulative settle trades. Now the critical thing that you need to know in every system is your drawdown. Now if you do not know your maximum drawdown then what really happens is that when you get a drawdown you will get fearful of carrying on with the system. Fear really grips you and you are paralyzed of placing your next trade. So this is why you need to know the stats even before you get into the trade. This is why we do a lot of back testing and research into the market to just pre warn us of what are the drawdowns that we should be looking at. So in this strategy called Smart Money we have done all our research. We do know all our drawdowns as well, we do also know year-by-year profits that average should be returning as well. As long as you know your maximum drawdown you can go pip size positioning. I cant stress enough about this particular point but as a newbie trader I think you should just start with one percent risk management ,even lesser than 1% if you have to.
This is why if I have to mention the three components that you need to be looking at:
Your crib sheet which have all your parameters, new consistent execution, for that keep working on your mind. We talked all about it in detail in Traders Essential Kit and the third thing is that you need to have a trade journal that actually records all your stats and you are continuously monitoring how it’s performing against the result that we have researched and discussed upon.
The point is that you are testing the system now, so you don’t need to jump into and put all your life savings into it. Start to test your system you can even start with £5000 it doesn’t matter. Here is what we are doing we are just forward testing the system and after that we start to scale it and reproduce it. The whole essence of this is that you are creating a strong reproducible model that can be scaled out in terms of position sizes and in terms of percentage risks.
I believe that this insight was very useful and of a higher value both to you as is was for the thousand of traders that we have taught. Till the next time as we always say stay disciplined, follow your trading plan and keep Trading like a Master.