Novice Traders' Notebook  |  JAN 2007

Trading Systems Defined by Martha Stokes

Stocks & Commodities V. 25:1 (16-22): Trading Systems Defined by Martha Stokes What is your trading style? Here’s an overview of different types of trading systems that can be applied to different markets. To succeed as a trader, you must understand how the market works. This begins with a foundation of core market knowledge, as can be seen in Figure 1. The next level is trading styles, followed by trading systems, and then, at the top, the implementation of trading strategies. One of the least-understood aspects of this formation is the trading systems level, second from the top. Without a thorough understanding of trading systems and the strategies designed for each kind of system, your trading efforts may yield disappointing results. (See Figure 2.) No matter how you trade the market, you are using a trading system. A trading system is not a strategy, a software program, or an entry signal. It is a set of rules and parameters developed around a formula of indicators and price action for a specific type of market condition. Often a trader will complain that a strategy doesn’t work. They struggle with meager results that entice them to continue trying but seldom pay the bills. These traders go from seminar to seminar hoping to find the “perfect” strategy. But it’s not the strategy that’s the problem. It’s the market condition under which the strategy is being applied that is not right. You must find the right strategy for the right market. Strategies work best when applied to the market conditions for which they were designed. But before you can choose a strategy for the current conditions, you must understand what a trading system is and which system works under what condition.

by Martha Stokes, CMT