Trading Systems or Trading Gimmicks

Trading techniques and trading systems are the methods by which traders perform their market analysis and make their trading decisions (e.g. when to buy and when to sell). Trading techniques are usually used by discretionary traders, and consist of a procedure for determining when and where to make a trade. Trading systems are usually used by system traders, and consist of a set of rules that determine when and where to make a trade. Trading techniques and trading systems come in an endless variety of shapes and sizes, but most trading techniques and trading systems are complete and utter rubbish.

The Cruel Irony of Trading Techniques and Trading Systems

Professional traders already have the knowledge and experience to know which trading techniques and trading systems could be profitable and which trading techniques and trading systems should be avoided, but professional traders are not looking for a new trading technique or trading system (because they are already trading correctly). New traders do not have the knowledge and experience to know which trading techniques and trading systems could be profitable and which trading techniques and trading systems should be avoided, and new traders are exactly the traders who are looking for a new trading technique or trading system (and even worse new traders are often still looking for the holy grail of trading).

How to Determine Which Trading Techniques and Trading Systems Should be Avoided

Without the knowledge and experience to determine which trading techniques and trading systems should be avoided, doing so would seem like an impossible task, but the following is some advice that should help new traders avoid choosing a trading technique or trading system that is nothing more than a trading gimmick:

Trading Techniques and Trading Systems with Ridiculous Names

Trading techniques and trading systems with ridiculous (i.e. funny, obscure, dramatic) names should always be avoided, because they are so named purely for marketing purposes, not because the name makes them a good trading technique or trading system.

For example, a trading system with a name like "Foolproof Market Predictor Plus" will be one of the worst trading systems ever created, and while it may be a foolproof trading system (as in it will be very easy to follow), it will certainly not be a market predictor, and its use will result in a minus being applied to your trading account rather than a plus.

Trading Techniques and Trading Systems that Only Make Long Trades

Trading techniques and trading systems that only make long trades (or only make short trades, but this is not usually the case) should always be avoided, because even if they are based upon sound theory (which is highly unlikely), they would still only be profitable when the financial market being traded is moving in the appropriate direction (i.e. upwards for a trading technique or trading system that only made long trades, and downwards for a trading technique or trading system that only made short trades).

For example, it is often the case that a trading system that only makes long trades will be marketed using spectacular results, but upon closer inspection the purported spectacular results will only have been so because the financial market being traded happened to be in the middle of the strongest bullish market in its entire history. If the same trading system was traded during a combination of a bullish and bearish market, or in a bearish market, the spectacular results would quickly become unspectacular results (or rather spectacular in the opposite direction).

Packaged Trading Techniques or Trading Systems

Trading techniques and trading systems that are sold as a packaged system (meaning that the basis for the trading technique or trading system is unknown or incomplete) should always be avoided, because the basis for the trading technique or trading system could be based upon anything (quite literally, even random trades).

For example, even if a packaged trading technique or trading system is marketed using profitable results, the profitable results could be based upon an obscure combination of events that happened to exist during a very specific time (e.g. a particular company releasing specific economic data during the second week of March five years ago), and has never existed before that time, and will never exist again after that time.

Obvious Gimmicks

It should go without saying that any trading technique or trading system that is an obvious gimmick should always be avoided, because ... well, because the trading technique or trading system is an obvious gimmick.

For example, a trading system that had a ridiculous name, and that was based upon made up technical indicators, and that recommended not even looking at a chart of the market price movement, would be an obvious gimmick that was designed purely to attract unknowing traders, and should therefore be avoided.

Professional Trading Techniques and Trading Systems

Professional trading techniques and trading systems do not have ridiculous names (if they even have a name at all), they do not make trades in only one direction, they are never provided as a packaged mystery trading system, and they are never based upon anything that could be interpreted as a gimmick. Professional trading techniques and trading systems are always based upon the underlying principles of financial market price movement, and professional trading techniques and trading systems are the only method of financial market analysis and trading that have the ability to be consistently profitable (hence the reason that they are used by professional traders).

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The Holy Grail of Trading

It is widely believed by new traders, that there is a single trading system, that is composed of a small group of indicators, with a certain configuration of indicator settings, that can be traded on any market and always makes a profit. Many new traders spend years searching for the holy grail, believing that it is the key to being a consistently profitable trader. If you are one of the traders that is looking for the holy grail, today is your lucky day, because the holy grail of trading is revealed in the very next paragraph.

The Holy Grail Revealed

The holy grail of trading is ... that there is no holy grail of trading. There is no trading system, no group of indicators, and no configuration of settings, that is guaranteed to make a profit. Disappointed? Well, don't be, because knowing that there is no holy grail of trading is a big step towards becoming a consistently profitable trader.

Market Dynamics

Instead of spending years searching for the holy grail, new traders should spend their time watching markets and learning how the various aspects of market dynamics interact with each other.

An example for short term traders (e.g. scalpers) would be watching the time and sales (also known as the tape), focusing on the ebb and flow of the buying and selling, looking for repeating patterns in the price movement. An example for long term traders (e.g. position traders) would be reviewing many years of market data looking for price and/or indicator patterns that occur at significant prices (such as yearly highs and lows).

By watching the markets, keeping a detailed log of anything and everything, and painstakingly analysing your log, you will develop an understanding of why and how the markets move. With this understanding, you will be able to choose (or develop) trading systems that are based upon market dynamics (such as supply and demand), and you will then have a significant advantage over the traders that are still searching for the holy grail.

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How To Learn Trading and Become a Professional Trader

Professional traders could be created via some magical process (probably involving those three witches that show up every three months), or they could wake up one morning suddenly knowing how to trade profitably, but they are not, and they don't. Professional traders are created by learning about trading, and then by experience using the information that they have learned.

Learning trading can be a relatively straight forward process, but it usually is not, because there is a vast amount of incorrect or misleading information available on the subject of trading. Sometimes new traders mistakenly believe some of the incorrect information, in which case they may never recover, and may never become a professional trader. Sometimes new traders realize which is the good information, and which should be avoided, and eventually become professional traders, but this can take months or even years.

So, what is the best (read as most efficient) method of learning trading and becoming a professional trader? The following is my recommended method of learning trading, and is the method that is most likely to create a professional trader in the shortest amount of time.

Trading Basics

The first information that new traders should learn are the basics of trading. A good understanding of the basics of trading will provide the foundation that will support a trader's entire trading career, and will enable efficient learning of trading's more advanced topics. The basics of trading include all of the factual information about trading such as, what trading actually is, the markets that can be traded, what contract specifications are, how buying and selling orders are placed, etc.

As the basics of trading are factual (i.e. the definition of a limit order is absolute), they are suitable for learning independently, and therefore can be learned from a variety of different sources (e.g. web sites, books, etc.). The day trading web site provides all of the information that is needed to learn the basics of trading (and the information is correct). If you are a complete beginner, then I recommend that start with the definition of trading and continue from there. If you are already somewhat experienced, then I recommend that you start with topics such as trading orders (even if you think that you already know these topics, as you may have learned about them incorrectly).

Advanced Trading

Learning trading's more advanced topics is somewhat optional, because the advanced topics tend to be specific to a particular type of trading, such as day trading the stock indicies via the options and warrants markets. However, at some point, most traders need to learn at least some of trading's advanced topics, and having a good understanding of trading's basic topics will be necessary. Whether you want to learn some of trading's advanced topics because of necessity (e.g. you want to trade options, so you need to know what an options deltais), or because of interest (i.e. you want your knowledge of trading to be as complete as possible), the day trading web site includes many advanced trading topics.

Trading Systems and Techniques

Learning a trading system or a trading technique is where learning trading becomes complicated, because what needs to be learned is no longer factual information, but rather an ability which can only be gained through experience.

For discretionary traders, the best method of learning a trading technique is to find a professional trader to teach you their trading technique. While most professional traders do not offer any trading instruction services, there are some professional traders that, for a variety of different reasons, do offer trading instruction services. Note that the best trading instruction will be from a professional trader that offers trading instruction as an adjunct to their trading, because their primary source of income will be their trading rather than the instruction (i.e. be very wary of so called professional traders whose primary source of income is providing trading instruction). If you are unable to find, or cannot afford, a professional trader to teach you their trading technique, then it is possible to learn a discretionary trading technique without any form of instruction, but the amount of time that is required will increase substantially (e.g. instead of a couple of weeks of instruction, it could take months or even years of trial and error), and the likelihood of success will decrease substantially.

For system traders, there are many trading systems available, but most of them either do not make a profit, or they only make a profit for a particular market, or they only make a profit for certain traders due to slight differences in how each trader trades the trading systems. It is possible to choose an already available trading system and trade it profitably, but only with significant knowledge and experience (i.e. a very good understanding of trading's basics, and many of trading's advanced topics as well, and the experience to know what is likely to be profitable).

Starting Learning Trading

So, to conclude as briefly as possible, the method of learning trading that is most likely to result in a successful trading career, is to learn the basics of trading from the day trading web site, then to find a professional trader to teach you their discretionary trading style and technique, and then to learn some (or all) of the advanced topics of trading as necessary for your trading.

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The Best and Worst Ways to Learn Trading

There are several different ways of learning trading. Some methods are relatively cheap, while others are seemingly expensive. Some methods are convenient and flexible, while others require a significant commitment of time. Beginning traders often choose a method of trading instruction based upon the wrong criteria, and in doing do they may be choosing an ineffective method, or even worse, a method that will do more harm to their trading than good.

Methods of Trading Instruction

The following methods of trading instruction are the most popular ways of learning trading. Each method is discussed in detail, along with its advantages and disadvantages, and whom it is most suitable for.

• Trading Books - Learning trading via trading books is possibly the most popular method of trading instruction, but is it an effective method, or a cheap and inefficient diversion?
• Trading Seminars - Trading seminars can be on of the most expensive methods of trading instruction, but are they worth the cost, or are they an expensive way of meeting other beginning traders?
• Online Courses - Online trading courses are one of the most convenient ways of learning trading, but are they also an efficient method of trading instruction?
• Trading Instruction and Mentoring - Individual trading instruction and mentoring can be one of the most expensive ways of learning trading, but is it also the most likely to result in a successful trading career?

Trading Without Learning Trading

There is an alternative method of becoming a successful trader, that does not require any trading instruction at all (except perhaps the basics of trading). Professional analysis and trading services are designed to allow less experienced traders to benefit from the analysis and trading suggestions of a professional trader. Professional trading services also include money management where non traders (i.e. investors) have their money professionally traded for them.

• Professional Analysis and Trading Services - Analysis and trading services such as daily market analysis, live trading suggestions, and professional trading (where your money is traded for you) are an alternative to learning trading.

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Introduction to Scalping

Scalping is a very short term trading style, and despite its odd name, it is quite a popular trading style among professional traders. Scalping is the shortest term style of trading (even shorter than day trading), and is so named because it attempts to make many small profits throughout the trading day.

Scalping is Technical Analysis

Scalpers are always technical analysis traders (as opposed to fundamentals traders), but they can be either discretionary or system traders. Discretionary scalpers will make each trading decision in real time (albeit very quickly), whereas system scalpers will follow a scalping system without making any individual trading decisions. Scalpers primarily use the market's prices to make their trading decisions, but some scalpers also use one or more technical indicators (e.g. moving averages).

Scalping Time frames

Scalping chart time frames, and the amount of time that each trade is active, are the shortest of all of the trading styles. For example, a day trader might use a five minute chart, and make four or five trades per trading day, with each trade being active for thirty minutes. In contrast, a scalper might use a five second chart (where each price bar represents only five seconds of trading), and make twenty or thirty trades per day, with each trade being active for only two minutes.

Scalping Techniques

As with any other style of trading, there are many different methods of scalping. The most well known scalping technique is to use the market's time and sales to determine when and where to make trades. Scalping using the time and sales is sometimes referred to as tape reading, because the time and sales used to be known as the tape. Other scalping techniques are similar to other trading styles in that they use bar or candlestick charts, and determine when and where to make trades using price patterns, support and resistance, and technical indicator signals.

Scalping Psychology

Scalping is most suitable for a specific type of trading personality. Scalpers must be very disciplined, especially in the case of system scalpers, as they must be capable of following their trading system precisely no matter what. Scalpers must be able to make decisions without any hesitation, and without questioning their decisions once they have been made. However, scalpers must also be flexible enough to recognize when a trade is not proceeding as expected (or hoped), and take action to rectify the situation (i.e. exit the trade).

To Be or Not To Be a Scalper?

If you are a position trader that uses daily charts, and makes your trading decisions over the course of an entire evening, you are most likely not going to make a good scalper. However, if the thought of waiting several days for your next trade drives you insane, then perhaps scalping would be suitable for you. Scalping can appear easy because a scalper might make an entire day's profit within a few minutes. However, this is an illusion, and in reality scalping can be very difficult because there is very little room (read as no room) for error. If you do decide to try scalping, make sure that you do so in simulation, until you are consistently profitable, and are no longer making any beginning mistakes (such as not exiting your trades when they move against you).

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Fundamental or Technical Analysis?

When day trading, a trader makes the decision about what to trade, when to trade, and how to trade, using either fundamental or technical analysis. Both forms of analysis involve looking at the available information and making a decision about the future price of the market being traded, but the information that is used is completely different. Is it possible to use both fundamental and technical analysis together, but it is more common for a trader to choose one or the other.

Fundamental Analysis

Fundamental traders use information about the global and national economies, and the financial state of the companies involved, as well as non financial information such as current political and weather information. Fundamental traders believe that the markets will react to events in certain ways and that they can predict future market prices based on these events. For example, if a company receives regulatory approval for a new product, a fundamental trader might expect the company's stock price to rise. Conversely, if a company has a financial scandal, a fundamental trader might expect its stock price to fall. Fundamental traders need access to all of the available information as soon as it is available, and are therefore often institutional traders with large support teams, rather than individuals. Fundamental analysis has probably been in use since there were markets to trade, and has traditionally been done manually, but as computing power increases it has become possible for some fundamental information to be processed automatically.

Technical Analysis

Technical traders use trading information (such as previous prices and trading volume) along with mathematical indicators to make their trading decisions. This information is usually displayed on a graphical chart and is updated in real time throughout the trading day. Technical traders believe that all of the information about a market is already included in the price movement, so they do not need any other fundamental information (such as earnings reports). There are many different types of charts and many different mathematical indicators. Some indicators are better suited to short term trading, and others are better suited for longer term trend following trading. Individual traders are usually technical traders. Technical analysis appears to have been used at least 200 years ago in Japan. Modern technical analysis is usually performed by the trader interpreting their charts, but can just as easily be automated because it is mathematical. Some traders prefer automatic analysis because it removes the emotional component from their trading, and allows them to take trades based purely on the trading signals.

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Discretionary or System Trading

One of the choices that every new trader has to make, is whether to be a discretionary trader or a system trader. Discretionary trading is decision based trading (i.e. the trader decides which trades to make), and system trading is rule based trading (i.e. the trading system decides which trades to make). Both discretionary trading and system trading have the potential to be equally as profitable, so the decision should be made based upon the personality of the trader. Some traders will instantly be able to recognize which type of trading is more suitable for them, while other traders may need to experience both types of trading before they can make a decision.

Discretionary Trading

Discretionary trading is decision based trading, where the trader decides which trades to make, based upon the information available at the time. A discretionary trader may still follow a trading system with clearly defined trading rules, but will use their discretion (hence the name discretionary trading) to decide whether or not to actually make each trade. For example, a discretionary trader might review their charts and find that all of their criteria for a long trade have been met, but decline to make the trade simply because they believe that the price is too high.

System Trading

System trading is rule based trading, where the decision to make a trade is based entirely upon the trading system (hence the name system trading). System trading decisions are absolute (if the criteria are met, the trade is made no matter what), and do not offer the opportunity to decline to make a trade based upon the trader's discretion. For example, a system trader might review their charts and find that their trading system's requirements for a short trade have been met, so they will make the trade without any further decision making process (e.g. regardless of whether they like the price or not).

As system trading decisions are absolute, system trading is perfectly suitable for fully automated trading. Once a computer program has been developed to recognise when a trading system's requirements have been met, the program can make the trade (including the entry, management, and exit) without any involvement of the trader. There are various trading and charting software that provides the ability for automated trading, such as VisualStation.

Are You a Discretionary or System Trader?

Discretionary trading and system trading have the same goal (making profitable trades), and may even make many of the same trades, but they are better suited to different trading personalities.

Discretionary trading is most compatible with traders that want to be in control of every trading decision (the entry, every aspect of the management, and the exit). Discretionary traders often feel uncomfortable when they think about giving complete control of their trading to a computer program. Discretionary traders often have backgrounds in artistic endeavours, such as writing and gardening. However, discretionary trading also appeals to traders with controlling personalities, and those who like to be in control in most aspects of their life.

System trading on the other hand, is most compatible with traders who want qualities like speed, precision, and accuracy in their trading. System traders have no qualms about letting a computer program make their trading decisions, and may even value the feeling of lessened responsibility that this allows. System traders usually have logical personalities, and often have backgrounds in areas such as computer programming and mathematics.

Combining Discretionary and System Trading

It is possible to be a discretionary trader that uses system trading, but it is not possible to be a system trader that uses discretionary trading. For example, a discretionary trader may follow a trading system for their entries and take every trade that the system identifies, but then manage and exit their trades using their discretion. A system trader does not have this option, because they must follow their trading system exactly. If a system trader ever deviates from their trading system (even for a single trade), then they have become a discretionary trader rather than a system trader.

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