Setting up a Simple Trading System

Setting up a Simple Trading System

As I stated in a previous article, I started trading about 4 years ago. I have lost thousands of dollars. I have also been fortunate to make thousands of dollars and quit my job. I trade for about 30 minutes every day. The remaining part of my day is spent volunteering at local charitable organizations, watching movies, or reading. This year alone, I have read 3 books: The Courage to Act (Ben Bernanke), Stress Test (Tim Geithner), and Confidence Game (Christine Richards). While my life is not perfect, I enjoy doing what I do even when I lose money. How am I therefore able to achieve all these without formal employment? A trading system. A manual one.

In my early trading days, I was simply a gambler. I used to enter trades and pray that it will go my way. Unfortunately (or fortunately), I lost a lot of money. Then, I started reading a lot of materials on trading. I also listed to many audiobooks on fund management and trading. YouTube became my friend in trying to understand technical analysis. By doing this, I was able to understand the importance of having a manual or auto trading system. An automatic trading system is one where the robot will either open trades for you or send you a notice that your combination has been reached. On the other hand, a manual system is one where you chart, and initiate trades yourself. I prefer using a manual trading system where I look at the market fundamentally and technically.

The first thing I do before trading is to check out the global financial and economic environment. I do this by checking out various news sources to get a view of what has happened at night. I use Bloomberg TV, CNBC, Bloomberg website, Reuters, Yahoo Finance, Market Watch, and an iPad called Net Dania. I don’t use the Bloomberg Terminal because I find it exorbitant. After checking out these happenings, I then have a look at the economic and earnings calendar for the day. I also do this every Sunday evening to get a scope of what will happen during the week.

After checking out the fundamentals, I then go ahead to chart using my system which is pretty simple. Basically, am a Swing trader so I tend to use daily charts. For indicators, I use a double Exponential Moving Average (EMA) with the faster average being 5 and the slower being 5. I also use stochastics and the Relative Strength Index (14). My entry position is triggered when the 5 EMA moves above the 10 EMA. The stochastics should always be looking up. However, if the stochastics indicator is in the overbought position, I don’t enter. Finally, the RSI should be above 50.

On the other hand, I sell short when 5 EMA crosses below the 10 EMA, the stochastics is in the overbought area, and the RSI is less than 50.

In my system, the exit position is triggered when 5 EMA crosses the 10 EMA in the opposite direction and if RSI crosses back to 50. I set my stop loss at 30 pips.

I have used this system for years. However, as I stated above, there are days when the market dynamics makes the system to fail. If you would want to try the system, I recommend that you take time to backtest it. You can also create your own system based on your trading strategy. If you are a long term trader, you must set up the system using longer-term parameters. You can also base your system on more than 3 technical indicators.