Trading Systems: What you need to know?

Trading Systems: What you need to know?

Making it big in the Stock trading domain is the dream of many, but the reality of a few. Stock trading is the sweet fusion of mathematics, economics, analytical skills, strategy and patience with little to no room for emotion. This is what systems are designed for, to enable trading in stocks with a logical strategy and without any ‘emotional bias.’

In this post, we will tell you what you need to know about the trading systems and their types. Let’s get going!  

Trading System: What is it anyway?

A Trading System is nothing but a set of algorithmic rules that either indicate for the trader or automatically execute the trade based on the technical analysis or indicators. You can think of the trading system as a ‘script’ for the trader to enhance his/her probability of a profitable trade.

Why do we need a Trading System?

Like any other business in the world, to remain consistently profitable in the stock trading, you’ll need a system. Just as any business follows processes to stay afloat & grow in the market, a meticulous trading system enables the trader to grab the best possible trading opportunity for profit.

In stock trading, traders lose most of their capital because of the following reasons;

  • Many traders jump into the market without any proper stock market training or attending stock market courses. They lack a solid trading plan.
  • Stock traders, especially the newbies, lack self-discipline. Even if they have a trading plan in the first place, they get easily distracted from their logically formulated strategy.
  • Emotional bias is another major reason as to why stock traders might lose their money in the market. Many of them take actions based on their ‘intuition’ or ‘gut-feeling’ which lands them into the losses.
  • Limiting the losses and the ability to accept them is crucial for any trader. It takes time for every individual trader to figure out their appetite for risk, hence the loss limit. Also, new traders need to keep in mind that not every trade is profitable, and not every trade is a loss. The goal, however, is to remain net profitable.
  • Lack of Commitment is attributed as another factor for stock trade losses. Traders who wish to do it part-time or just as a hobby often witness losses. You’ll have to take out adequate time for learning and actual trading.

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A trading system eliminates all the above factors for every stock trader!

Types of Trading Systems

There are two major types of trading systems;

  • Discretionary Trading System
  • Mechanical Trading System

Discretionary Trading System

A Discretionary Trading System is the one where the trading rules are set by the trader based on his/her knowledge and experience. A Discretionary trading system is much more complex than a Mechanical trading system and can sometimes prove to be much more effective than it in certain trade scenarios.

Benefits of Discretionary Trading System

  • Works well in case of experienced traders
  • Well suited for those who like to analyze charts and graphs manually
  • Follows a mix of trading fundamentals and trader’s knowledge

Cons of Discretionary Trading System

  • This system requires years of experience to master
  • Requires heavy human intervention
  • Coding its algorithm can be tough

Mechanical Trading System

Mechanical Trading System is the simplest form of trading system which is driven by a set of rules. A Mechanical trading system executes a buy or sell action once the set conditions are met. As soon as the conditional rules are met, the system triggers the appropriate action.

Due to its simplicity, Mechanical trading system can be automated, requiring little to know human intervention in trading.

Benefits of Mechanical Trading System

  • Fixed rules without any scope for discretion
  • Can be easily automated
  • Based on logic and leaved out any scope for emotional bias
  • It is easy to be coded into an algorithm

Downsides of Mechanical Trading System

  • Uncertain market movements can prove the system to inefficient
  • Coding and Programming errors in the algorithm can yield losses
  • The system can be ineffective if complex trading indicators are being used

At this point, you are sufficiently aware about the basics of trading systems before getting started with stock trading. It is always advisable that you undergo the right stock market training before jumping right into the pond.

Happy trading till then!




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