an experienced trader to help you, or some reference from which
FIGURE 5.1 5-Minute S&P
Source: © TradeStation Technologies 1999. All rights reserved.
to start. Books, trading magazines, and the Web are a good way for the beginning
trader to start. Though these resources should just be regarded as
reference and starting points, they can head you in the right direction. Go
through a few books until you find a few systems that you think you could
follow, then study them. Learn why the author is using the indictors he is
using and how he is using them. Back test the system yourself to see how
it actually works. Authors are not above giving you a system, back testing
it on perfect data, and showing you optimized results. Sometimes they
only back test it for the amount of time needed to get ideal results. They
will cut out a bad period at the end or start of the system if it gives them
better results, so do the work yourself and do not rely on an author. Next,
play around with it, changing some parameters or adding an indicator so it
suits you better. Keep testing it. Make notes as to what a change does to its
overall profit and loss.
You can also buy systems if you want to try that approach. If you read
any trading magazine or go to a trading web site, you will see systems for
sale all over the place. However, I don’t believe you’ll be successful trading
a purchased system. First of all, it will be hard to follow it in the manner
the creator intended it to be used. You will always be better able to
FIGURE 5.2 Daily S&P
Source: © TradeStation Technologies 1999. All rights reserved.
follow a system you came up with yourself. Even if your system is inferior,
it may yield better results than one you cannot follow. Second, when
you use someone else’s system, you are not learning anything about trading,
you are simply placing buy and sell signals. This may be fine for some
people. But because you are reading this book I expect you want more
than that.
The best method of creating a strategy is by being around other traders
and watch what they do. You will be able to pick up features of their trading
that you like and soon you’ll be able to devise your strategies. By having
mentors you can ask questions and have them guide you when you are
struggling. But make sure you are listening to people who know what they
are doing. I’ve found that it’s usually the losers and beginners who like to
give the most advice. Not everyone has the luxury of being surrounded by
great traders, so those who don’t will need to work harder.
Be Patient
Developing a strategy is not something you will do overnight. It takes time
do get this right. I believe that until you have been trading about two years
you won’t have all the tools you need to do it properly. During those first
two years you will be learning the different indicators, how they work, and how the market reacts to them, as well as how it reacts to the news. Don’t
get discouraged, you cannot start trading and a week later expect to know
everything. You will get to know your style of trading as well as some of
the nuances of the market, but it will take some time. My first strategies
came from reading Technical Analysis of Stocks and Commodities magazine
and my limited knowledge of technical analysis plus stuff people told
me would work. Armed with these tools, I put together some basic rules
and started to trade with very little back testing. I didn’t last too long. For
one thing, I didn’t have a clue about risk, but more on that later in the book.
I was trading using strategies that I thought would work but in reality they
were not positive trading scenarios. Though some of these systems generate
purely systematic signals, I only expected them to work because the
magazine said they’d be positive. I didn’t know any better at the time. I
thought if I just followed a good system, it would work for me.
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