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The standard definition of modern trading goes something like this.
The modern trading system for stocks is a complex and dynamic network of electronic platforms, software, and algorithms that enable the buying and selling shares in various markets, where orders are executed electronically through computers and networks.
Numerous articles on financial trading also generally note that today, 70% to 80% of all trading done on stocks is done by a trader using computer-assisted trading. How can an individual trader compete in this environment?
That is the Challenge!
We took all of the classic steps of the other Modern Trading System and rewrote the rules so non-professional traders can use them.
The principles are straightforward.
Now, if you were a large hedge fund, you would approach these issues completely differently. But, as an individual trader using your own money, it’s very different.
Let’s discuss the general approach to be used. We will take them one-by-one.
We will use rules every time we trade. We will be disciplined to never waiver from the rules. (That will save us.)
Rule #1:
We will control risk by never placing a single trade with more than ten percent of your trading money.
Rule #2:
Do not place more than two trades in assets in similar exposure to actions.
Rule #3:
Keep trade duration reasonably short, say from 1 day to 2 weeks.
Rule #4:
Only trade assets with strong indicators of profit.
Rule #5:
Never open a trade on an asset that is moving against the trading direction.
We define efficiency as making the most gain (profit) in the least amount of time. As we do our trading we will continually evaluate the efficiency using a value called “Annualized Return on Investment” or (ARR). Let’s explain why this is so critical. When someone generally evaluates a trade they use a term ROI (return on investment). So in their thinking, if they make a $1,000 trade and after a year they make $200, they may say that it was a good trade because it made a 20% ROI. But if you made a trade of $250 that lasted for two weeks and made $5, you did much better here is why. It only took you 10 trading days to make the $5. This works out to an ARR of 52%. The lesson here is that we want to make profitable trades in short duration.
Another efficiency benefit of short trades is that they protect you from unforeseen activities that could take your trade from a gain to a loss. This is especially true in these highly volatile trading markets like we have now.
This issue is one that many traders cannot accept, but it is universally identified as a significant cause of non-professional trader’s angst and high losses. When you trade, there are always times when your active (open) trade shows a loss. This is called “drawdown”. An important fact to bring up here is that as long as your trade is open, and you see it below your opening price – that is not a loss. It only becomes a loss if you close the trade at that time.
However, seeing trades go wrong can cause great stress. This is where discipline must kick in. You need to have a prearranged rule to give you a smart point at which you could close the trade. Most of the time, the trade will rise back and close with a gain (but not always). Actually, there should be a couple of rules set for this purpose. Learn more about these later on.
The last element of this whole thing, is that once you find a good trade that fits your rules, you need to rapidly execute it. Often times the entry price you pay sets the pace for your overall gain. Because this trading system is built around numerous smaller trades, the better the entry price the better your trade. We will discuss how this can be sped-up later on, but it definitely can be faster than you think.
If you are interested in learning how we deal with these challenges, and see what our unique AI enabled tools can do to help, click here.