5 Steps to a Great Trading System

02/23/2015 7:00 am EST


Price Headley

Founder and Chief Analyst, BigTrends.com

Price Headley of BigTrends.com outlines five things to consider when building or automating your trading strategy.

The process of creating a successful system takes discipline, precision, and time. All successful trading systems must survive BigTrends' rigorous benchmarks. In this report, we will discuss the key components to creating a successful trading system.

The process of creating a system is not easy; that's why I am sharing with you my breakthrough findings on key points to help you create a more effective system. This is part of the same process that we've used to design the core signals behind our real-time option trading alert programs. 

Without focusing too much on the minutiae involved in the day-to-day actions of system, design I'll provide you with a template to follow in creating your next system.


The backbone to any system is quality research, especially in the often zero-sum game of options trading. It's crucial to have an advantage on every level you can. In my view, this is the step where you choose your indicators, normally based on a logical theory or observation of price action.

To create the best system, you need primary indicators and supportive indicators. Similar to your investment team, you need a leader and a support staff, and each contribution should deliver something unique. For example, using only volume indicators is not recommended-your system would not be diversified and may overlook key signals found from other types of indicators.


When you choose your indicators, you should have an end result in mind. What is your risk appetite?  Design a system that fits your needs, and trade the right system for your goals. The design should also consider time frames: similar to your indicators, you should have a primary time frame and a secondary (supportive) time frame for confirmations. When we design a new system, we consider the results goal in relation to the strategies used to reach those benchmarks.

Results Driven

After researching and designing multiple systems to test, a successful trader will focus on results. Each system that you test must be scrutinized based on its ability to surpass previously determined benchmarks. In this step, many traders lose focus and create a false sense of success in their system-they want to believe it is better than it truly is. A good way to circumvent overvaluing your system is to have a third party evaluate the results.

See related: How to Spot a Winning Trading System


At this point in the process, you should feel comfortable with the logistics of your system. The system should be a strong performer based on your goals and is now ready to implement. Most traders treat a new system much like a small child treats a new toy: they are emotionally attached instantly. You must avoid this. 

Try this instead: give the system to another person to trade. This will ensure that you are clear in your rules and trades are managed without emotion. Finally, your initial implementation should seek to trade smaller position sizes, at least until the system is given the stamp of approval.

Evaluate and Improve

Set a trial period for live trades; yes, that's right, real trades. Paper trading is important, backtesting is crucial, but live trading will provide proof. Based on the research and design processes, you should have expectations for your system: were they met during implementation? 

Focus on the best and worst trades during this period and find a common thread to exploit and improve your system. This process is ongoing, and when a system is perfected is usually when it's time to adapt to the market. That is, the most efficient systems are always being evaluated and improved.

There's much more to the science (and art) of building a profitable active investing tool, including utilizing (and creating) technical indicators, optimizing trading inputs, choosing a universe of securities, entry/exit and profit/stop rules, etc., but incorporating a systematic approach (such as described above) to your trading will benefit your portfolio in many ways.

By Price Headley of BigTrends.com

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