A trading system is a methodology of trading. An investor who uses one system and follows a specific set of guidelines when making a decision, follows system trading, and will usually never deviate. A trading system is only one method of trading, and usual requires no thinking. It is possible to have one system that is governed by multiple system.

For example, to have 10 different systems, and select only one stock from each system every month according to the main system’s qualifications.

Someone that uses several Trading Systems is a multiple system trader. They have to either have an overall system that encompasses all of them, or make their own decision on which to follow. Doing so can be dangerous, as the purpose of system is to prevent human error. It is advised to be a system trader who trades one system at a time, or trade multiple systems within a larger core system, and avoid being a multiple systems trader.

Trading System - Trading can be awfully hectic without some kind of methodology. You can’t expect to take on the best traders in the world who have teams and resources at their disposal just by throwing around money at will hoping that it works. You need an actually defined system in order to be able to trade effectively.

Many successful systems are based on earnings and high potential for growth. Stockbee’s trading system often swings for the fences. As a result, it requires a solid degree of protection. Obviously you shouldn’t limit yourself to someone else’s system, you need to find one that is right for you.

There are two kinds of traders, technical traders, and fundamental traders, each has their own system. Of course there are some who use both.

Technical traders

Some system traders, are day traders. Others are swing traders. Still other people are more of a trend trader. Each will have it’s unique system. The system will be based on the technicals. Is it volume that triggers the buy? Is it price movement? A combination of both? Or perhaps it’s pattern trading.

Some people even have trading machines or robots that do the work for them. Others rely on pattern recognition done by a system. The method is to sign up for email alerts, or some form of alerts, then make a purchase based on the software’s recommendation. There are some people that screen down a stock based on strong fundamentals, and only trade those stocks, but trade them based on the technical chart patterns and volume.

They will sell based on a trend break, or rules on when to take gains such as 20% gain according to their system. They will set a stop loss based on their system as well. It might be 4%, or 8%, or it may be a trailing stop.

Fundamental traders

Fundamental traders might do things a little differently. They are looking for improving fundamentals, or stocks that pass through a certain screener. Zacks.com is a great resource if you want to rely on fundamentals. Earnings is always a big part of a system, and the Zacks’ ranking uses earnings revision to get in early when the earnings and company internals appear to be improving. Zacks’ has several screens, and their software allows you to screen stocks according to many different options.

Regardless of your trading system, one thing remains important in every single system. Money Management and loss protection.

It doesn’t matter what the upside is or win rate is, if you can’t protect yourself from major declines, you shouldn’t be trading. I don’t care if your system is 90% effective (no system is and if they say they are, they’re lying), and if the gain is 1,000%. If you put all your money on it repeatedly, eventually you will suffer a loss so catastrophic you will never be able to recover without borrowing money. By taking one loss, you hinder your ability to make money. That is more costly then the potential for greater gains that you would gain by taking additional risk.

Just to illustrate if your system causes you to take a 95% loss, you need a 2000% return just to make up for that loss. You cannot trade like this. No system is better then it’s weakest link. That weak link unfortunately for many people is the ability to manage money. Fortunately, it is a skill that can be learned, and doing so will make you a better trader. Better yet, if you do not wish to be a better trader, you can simply follow the rules of a system that contains a methodology on how to manage money and how much to invest before placing a trade.

I recommend that you either have a trailing stop or a hard stop. You can also buy a protective put if you are afraid of a stock bottoming out overnight and plummeting through the stop. Protective puts are like owning insurance. Unfortunately, you have to continue to buy the insurance as it eventually expires if you don’t use it. Don’t trade options without learning everything about them.

Some puts are not good for some strategies. Longer term trades and Investments will require long-term equity anticipation securities, or LEAPs, where as you may not need to risk as much capital for short term protective puts. A trailing stop should be usually 20%, where a hard stop should be more like 7%. Different systems will require different stops so take this with a grain of salt.

A good investor or trader actually will rarely need to ever be fully invested. There are people that trade on complete margin for a few times the entire year, and the rest of the year they’re on the sideline, but generally the best traders that have a career that lasts have lots of money on the side, even more so if they use options and are unhedged. If you are unhedged, that is only playing one side of the market, (all buys, or only playing one theme such as only playing inflation or only playing deflation), you need to have even more cash on the side.

The lower the win rate, the more money on the side you need, and the smaller your positions should be. Any good system won’t require you to analyze. Having to do a lot of the thinking can cause you to panic and make incorrect decisions. Most people aren’t cut out for that, and that’s why it is a smart thing for many to use a trading system.

If you trade within a system, you have a much better chance at placing winning trades. A trading system will have a solid record of success, evidence that it works and has been working, an understanding of the decline and proper money management planning. If you trade within a system, you can estimate your results, and by doing so attain measurable success consistently with a trading system.

Day trading has made fortunes for many stock traders; this is one of the few types of trading where large profits can be made quickly by those with a limited amount of capital. However, there is always risk associated with investing and traders can lose large sums as well as reap sizeable profits, leading many to be wary of this market. A lot of day trading ebooks focus on futures these days.

While the futures market is well known for being a risky path to take, some experts would argue that it is as risky as you let it become. If you are careful and plan things out right, then you will probably do a lot better than you would just be jumping in headfirst and throwing caution to the wind.

What Are Futures?

Futures are what are known as contracts, and they are transferable. They represent buying a stock or commodity at a set price. The one who holds this contract is bound to make the purchase, and the seller has to deliver on everything that happens to be in the contract. Futures aren’t quite the same as options, simply because they’re an obligation to buy and sell instead of allowing the buyer and seller the right to buy or sell the named asset.

In order to gain a profit from futures you’ll need to do what is called speculative trading, based on changes in the asset price on the open market. Such changes and alterations may show gains, or losses, that might be huge, or very tiny depending on what happens.

Emini contracts are the most popular contracts traded these days. Most courses and ebooks these days are actually some form of emini trading system.

How And Why Are They Traded

Futures trading is particularly popular with day traders, since many futures contracts can be traded at a low initial investment and there are a wide range of markets which can be traded in this way. You can trade futures whether the market is expected to go up or down. If the trader expects the market (and thus the value of the futures contract) to go up, then they will perform a long trade, purchasing the contract and selling it once the value has increased. If the trader expects a decline in the market and the value of their futures contract with it, they will perform a short trade, selling one contract to enter and buying another to exit.

A trader that is good at what they do will manage to make a profit regardless. Many traders worry about what direction the market is moving in instead of what direction things are moving in because of this.

Futures trading can be risky, but any investor who has a good understanding of stock trading and how the market operates should be able to do well in futures trading. It involves being able to spot trends in the movements of the market; something which should be second nature to any experienced stock trader.

It’s not hard to get started in futures trading, but it’s not something to be jumped into headfirst if you’re not an experienced trader already. Educate yourself about the market and read everything you can about this potentially very rewarding investment venue before you make a serious financial commitment in futures trading.

For investors looking to learn stock market investing, technical analysis often provides an unbiased and objective reading on whether or not to take a position in a particular security. As noted in the balance of the series, some technical analysis is simple while the rest can become complicated, particularly for those who are trying to learn stock market investing techniques. The Relative Strength Index of a security is medium to difficult.

What is the Relative Strength Index (RSI) The RSI is an oscillator that measures a security’s “relative strength” against its own price history. This technical indicator allows the investor to determine whether the security is currently overbought or oversold and, in fact, provides a better indication of support and resistance levels than the security’s price chart would.

How the RSI Works In terms of getting a signal from oscillators, the RSI is a little different from the others that we have covered in our technical analysis series as it does not provide a clear buy or sell signal. Instead, the RSI works on a scale of 0 to 100. Of interest to the investor are the following: Level 0 to 30 is oversold; 30 to 70 is in range and; 70 to 100 is overbought. How this impacts a trading decision will depend on other implications facing the investor.

Calculating the RSI Mathematically speaking, the RSI requires a touch more work than other technical analysis calculations. To determine a security’s RSI, you use the following: 100 - [100/(1 + A)] where A is the average up closes over the period divided by the number of down closes for the same period. If you use a period of 14 days (the norm, it seems) and had 7 up days and 7 down days, then your RSI would be 50 which is in range.

Using RSI to Trade Securities The RSI is more useful than just providing buy or sell signals to investors. First, the RSI will show areas of support and resistance more clearly than security prices would. Second, overbought and oversold conditions can help determine whether one should sell, buy or hold an existing or non-existing position. They are not typically used on their own to trigger a buy or sell as they provided bearish (0 - 30) and bearish (70 - 100) signals. Using tools such as the RSI to determine safe or unsafe points of entry and exit is really the whole purpose of technical analysis in the first place.

Trading software can alleviate a lot of the time consuming and draining calculations needs to produce a solid buy or sell signal. Although technical analysis involves many aspects and signals, such software can change an individual investor’s experience from overwhelmed to simple… or at least make it simpler.

For anyone who has been invested in the markets over the past two years, it should come as no surprise to discover that market volatility, as measured by the Chicago Board Options Exchange, has risen from the range 16 to nearly 80, the highest level ever recorded.

In fact, after the attacks of September 11, 2001, volatility jumped to just 33. They closed the markets as a result of the uncertainty! Today, the markets feel subdued, yet are registering volatility in the range of 30. This presents plenty of opportunity for investors to profit.

For the individual investor, the first thing that needs to happen is to strip away the emotion from the investment. This is challenging, however, and for good reason. Most investors have worked extremely hard to build a nest egg, and watching a volatile market eat it up without providing any tangible benefits is extremely difficult to stomach. One solution is trading software, which is a lot like a money manager in that it does not know or care how many hours or sacrifices one had to make in order to save such a nest egg.

The second thing the investor needs to do is understand volatility. This can be done primarily by studing graphs on sites like Yahoo! Finance (type “^VIX” in the quote section) but also by realizing and appreciating the dictionary definition. Volatility is the rate of change in a price’s deviation from its mean. This means that the higher the volatility, the more quickly a price will deviate from it’s mean price.

The final thing the investor should do is control his or her greed. Again, this is difficult to achieve as short-term returns suggest longer-term returns. Again, removing the emotion of greed can be achieved by using trading software that measures concrete factors like volatility, moving averages, momentum, etc..

While trading systems allow investors to remove the emotional side of investing, they are not absolutely required provided that the investors can control their greed. By eliminating emotion, investors can take advantage of the profit opportunities that volatility offers.

There are two basic way to analyze the price movement in Forex. One is fundamental analysis that uses the economic and political news. Another one is technical analysis that uses chart patterns and technical indicators.

Technical analysis is based on analyzing chart patterns. Ideally you need to look at past chart data and recognize the patterns that precede or follow the trends. Once you learn to recognize the patterns you will be ably to predict the future price movement to some extent.

Traders usually use three types of price charts:

- The line chart is the first one

Line charts simply plot each closing price and join them with a line. The rise and fall of the line shows the general movement of a currency pair. However, it does not show movements within the trading period, only the close.

2. Bar charts

Bar chart on the other hand gives us some information about the price movement within the time period. The bar chart consists of vertical lines or bars. Price forms the top of the bar by reaching the maximum value during that time period. It forms the bottom of the bar when price reaches the minimum value within that time period. Besides the vertical bar there are two short horizontal ones. The one at the left is open price and one at the right is close price of that time frame.

That’s why the bar charts also called OHLC charts. It stands for open, high, low and close.

- Candlestick chart is the third one

Forex candlestick charts show all of the same information as a bar chart, but presented in a different way which most people find easier to read at a glance.

You have the same vertical line with the high at the top and the low at the bottom, but there is also a wide block in the middle showing the gap between the opening and closing price. The blocks will be filled white (for a rising price) and black (for a falling price) or more often these days they are colored. Colors can vary but a common combination is green or blue for rising and red for falling.

The reason many traders prefer candlestick charts is that it can be read and interpreted easily. Trend and turning points are clearly seen due to color difference.

When you see a trend forming, you can make money by trading in the same direction as the emerging trend. ‘The trend is your friend’, as currency traders say. For this reason, identifying the trend is the most important thing to learn in Forex technical analysis and using candlestick charts is probably the easiest way to do this.