The trading system is one of the most important factors for profitable trading. Without a quantified trading system, you can not make money out of the market, and hence you should develop a well-researched trading system before trading with large capital.
In today’s article, I will tell you how to make a good trading system or what factors you should keep in mind while making your own trading system. So, let’s discuss what it takes to make a perfect trading system.
Irrespective of which trading system you trade, it is always important to keep in check the risk of your capital. If your average of losing trades are more than your average of winning trades, then you are probably doing something wrong.
There is a famous rule which is called the 2% rule in trading, which states that you should never risk more than 2% of your entire trading account on a single trade, including brokerage and other taxes.
For example, if you are trading with 1 lakh capital, then you should not risk more than Rs.2,000 on a single trade, including brokerage and other taxes.
So, this is the most basic but effective risk management rule you should consider while making your own trading system.
I often say that trading is a very personal thing, the trading style which is suitable for me may not be suitable for you. So, you can not make money from the market by copying someone else’s system.
It is important to know where you are comfortable; maybe you are comfortable in equity trading, option selling, or futures trading, or in trading some other instrument; you have to decide by trading different trading instruments and self-analysing where you are most comfortable.
Often, many new traders initially try to copy other traders’ trading styles, and they end up losing money because, most of the time, they are not psychologically ready to handle those PnL fluctuations. Hence, they end up committing a lot of mistakes.
So, before making any trading system or following any trading strategy, you should always take into account your comfort level, and according to that, you should trade. If you are not comfortable with a particular trading system, you will not be able to make money by following that strategy in the long run.
Journaling will help you a lot in the development of your trading system. Journaling helps you in analysing how your trading system is performing in live markets and also whether you are following it with 100% ability or not.
By knowing this, you will see exactly where your trading system is going wrong or where you are making a mistake. So that next time, you will improve your trading system and trade better.
Also another advantage of journaling your trades is journaling tells you about the thoughts coming into your mind when you are trading. As we say, our thoughts define our actions; by improving our thoughts with the help of journaling, we can definitely improve our actions.
So, irrespective of any trading system you use, journaling will always help you in improving that trading system through thorough analysis.
So, these are the major points you should focus on in order to make an excellent trading system. To summarise this article, I would say with good risk management rules, the right trading psychology, and journaling, anyone can make a profitable trading system and earn consistent profits from the market.
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