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The advantage of a systems trading approach to the markets is that it tries to take some of the emotion out of the market. A solid trading system design incorporates nine very important processes:

1. Know which markets you feel comfortable with and can afford to trade.
2. Learn all you can about these markets, so you will know which indicators to use.
3. Design a trading system around your knowledge.
4. Test your system for flaws before you trade real-time.
5. Decide when to get into the market.
6. Decide when to get out with a profit.
7. Decide when to get out with a loss.
8. Implement your trading system.
9. Fine tune your trading system and continually evaluate your system.

There are three building blocks in any system: market entry, exit with a profit, and exit with a loss. Identifying these and making decisions about them is a key element in a successful trading system.  Before you trade, keep asking yourself: Where should I get into the market? Where should I get out with a profit? And where should I get out with a loss? You need to know the answer to all three of these questions before you trade. If you know the answer to only one or two, you do not have a complete trading system.

The key to system development is to combine long-term, intermediate term and short-term indicators in the best possible way. To determine the long-term trend, you need to measure weeks and months of price action. Moving averages and trendline analysis usually work pretty well for this purpose.

For intermediate signals, you have to look at the last few days of price action. Some of the more reliable indicators include DMI crossovers, channel breakouts, parabolic signals, and pattern recognition methods.

Basically, long-term and intermediate indicators say it’s time to get into the market—you then have to time your entry. There are a variety of possible approaches that include such things as Fibonacci retracements and various cycle figure studies. The most important thing is to get at a point that reduces the possibility of a countertrend move that will prematurely force you out of your position.

Although most traders focus their attention on entering the market, the key to profitable trading is knowing how to exit. Consider establishing a minimum acceptable profit level directly to amount being risked. If you risk $800 in a straddle position, put in an objective of $1600. This is your targeted profit exit.  For a predetermined dollar loss you could establish a $400 target. You can also tie your exit to a predetermined time frame say a week after earnings or 30 days before expiration.

In summary, an effective trading system has to clearly delineate the market entry price, the exit with a loss price, and finally the exit with a profit price. How we determine these prices is up to the system designer, and, with the abundance of technical indicators available, it is no wonder we have so many trading systems on the market. However, I like developing and testing new systems because of all the different combinations we as trading system developers can create.

Happy Trading.

Jeff Neal 
Senior Writer, Options Strategist & Profit Strategies Radio Show Market Correspondent
Visit Jeff’s Forum
Listen to Jeff at www.ProfitStrategiesRadio.com

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