A trading system or trading plan is a set of rules which you follow while you trade. Good trading plans will tell you what to buy, when to buy it, how much to buy and when to sell. It is like a map, used by traders to guide them through the markets. Your trading systems should give you an edge in the markets provided you have back tested them and found them to be profitable.
Then, it is up to you to trade it. This is where the hard part of trading comes in. To follow the same plan until it becomes habit before starting to trade a second plan.
A good analogy which I think you will understand is driving a car and stopping at a red light. My guess is, that provided you drive a car and live in a relatively law abiding country, when you come to a red light you stop. You don’t stop sometimes or most of the times you stop all of the times. You know that when you don’t stop there is a reasonable probability that you will be in a car crash which could injure you for life.
Yet when it comes to trading it is likely that most traders do not have a trading plan yet alone follow one. According to Mark Douglas in his book Trading in the Zone: Master the Market with Confidence, Discipline and a Winning Attitude once you have found an edge and can consistently trade it, you should be able to constantly pull money from the market over time even though the stocks that you trade will give you random results.
Just like stopping at red lights once you begin to consistently trade your system you will find that there are trades that work and those that do not. You will only know the outcome of a trade after the trade is completed and not before and there is no way of knowing prior to a trade where the stock is headed. You may have hunches but you have to remember that even your hunches have a probability associated with them.
I have not found anyone yet who can say with a great deal of confidence that 100% of their trades worked out, unless you are talking to someone who has only traded a few stocks all of which were winners. This is called luck and has no place in your trading system.
Need a little help in developing your trading plan? Then follow us over to the trading system page to begin your journey.
Unsure how to build a trading plan or design a system. Check out this resource to learn about writing your own trading plan and our page on understanding the stock market. which reviews a few different ways to trade the markets.