Building a Trading System

TradingPub Admin | March 15, 2013

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Special thanks to our friends at for the following guest post on trading systems!

From Scratch, Step by Step

Trading successfully often means counteracting your natural psychological tendencies to react to fear and greed. You have probably heard many times that successful traders use a systematic approach to trading.  That is establishing strict criteria for entries and exits. Only by creating a set of rules can you begin to realize some sort of consistency with your trading performance. Otherwise, trading by just shooting from the hip is really no different than gambling. When you put together a set of concrete rules (trading criteria), this is known as a trading system.

Why create your own trade system?

Whether you want to become a full-time professional, or keep your day job but want to manage your own money, a trading system is critical to success. This also applies to you if whether you trade several times a day (daytrader) or you trade long-term positions over many months. But why create your own?

There are various reasons for doing this. A trading system is highly personal. It must fit your trading style/personality and risk profile. A successful trading system is only as good as your ability to trade it, and your ability to trade it depends on your confidence in it.  The best way to successfully trade it is to be 100% confident in it; because when you’re staring down a nasty loss after 5 straight losing trades, the only way you’ll take that 6th winning trade is if you have unshakable confidence in your system’s performance as a whole.
Confidence is gained in your trading system when you have researched it, backtested it, forward tested it and you have made it your own.

Is it really that easy?

I’d be misleading you if I were to say that creating a successful trading system (and then trading it) is a piece of cake. It takes many hours of trial and error, studying the charts, iterating and sim trading. But before that, you gotta learn the basics.
In this article and future ones to follow, I will be going over the basics of creating a trading system. It will be geared towards beginning to intermediate traders and will assume you have some basic understanding of technical indicators and access to charting software (such as NinjaTrader).

Let’s Get Started With Some Basics

Trading systems run the gamut in terms of the endless variety of ways they trade. You’ve probably heard that there are trend traders, and counter-trend traders. Trend traders tend to go with the flow, and counter-trend traders tend to think against the grain. Which style you ultimately gravitate to really depends on your personality. There are an endless number of trade systems in either category; but one thing they have in common is they need something to definitively identify the current trend, be it bullish or bearish.

Price Swings

Prices tend to fluctuate in an oscillating pattern, creating shelves and troughs as they swing up and down.
So this brings us to the first lesson: using indicators to determine trend direction. Let’s start simple and look at what we call price swing patterns on a chart:


Using BloodHound for NinjaTrader, we have here a typical price chart with the price swings identified in green and red colored lines drawn on top of the price bars. As the price swings up, we have a green line going up, and as the price swings down, a red line. When the swing changes direction, you can see that the price has appeared to bounce off an invisible floor or hit a ceiling. If that imaginary floor keeps moving up as it did from 11:28 to 11:36 in the chart, we call that a higher low. That is the price’s recent low point is higher than the last one (in this case the low made just after 10:38). Similarly the ceiling moved up as well as the price established what we call a higher high from just after 11:27 to 11:33. This price pattern where price keeps establishing higher highs, and higher lows is identified as a bullish uptrend.

Similarly, if that ceiling appears to be progressively lower (and the floor as well), the market is said to be making lower lows, and lower highs. This is an overall bearish trend.

You can see clearly that BloodHound has also marked the areas with green (bullish) and red (bearish) zones on the chart for which way the overall trend is going.

So now What?

Now that you have the trend identified we you can take this information to go either against it or with it depending if you are creating a trend trading system or counter-trend trading system. The overall trend can be used as an overall permissive (trade filter) to go long or short. While it can serve as a big piece of the puzzle, it is merely a building block to start your system. A full trading system will require at the very least some sort of entry signal. We will be covering that in a future article.
Stay tuned!

If you are interested in building your own trading system, check out -