How to Develop a Complete Trading System

Five Parts:Writing Your Trading PlanComposing Your Trading StrategyGathering Your Trading ResourcesBacktesting and Paper TradingLive Trading

Trading stocks using a system you develop yourself helps you succeed as a trader. A complete stock trading system has five basic parts or components. These components can be developed in step-like fashion and should be made to work together.

Part 1
Writing Your Trading Plan

  1. Image titled Trade Binary Options Step 6
    Understand what a trading plan is. A trading plan is an overview of your entire trading system. This makes it a natural place to start since it touches on every component.[1] It covers everything from why and what type of stock trader you will be, to how your will conduct your trades and with whom. It even provides back-up contingency plans for emergency situations.
  2. Image titled Get a Trademark Step 6
    Decide on a medium. The actual form a trading plan takes is entirely up to you. It may be written on paper by hand. Or it may be formally typed into a word processing program. You can even use a whiteboard or chalkboard.
  3. Image titled Trade Stocks Step 9
    Decide on a format. You can write a trading plan like a business document, strictly in the third person. Or you can personalize it by using first-person pronouns. One effective way is to format it like you are conducting a self-interview.
    • For example, you might have a series of questions like "Which financial markets will you trade?" with answers that immediately follow: "I will trade the NYSE, NASDAQ and the TSE exchanges during regular and extended hours, and occasionally trade forex." This encourages you to self-reflect, and helps you map out how you will tackle the remaining components of your trading system.
  4. Image titled Trade Stocks Step 12
    Brainstorm what will go into your plan. Since a trading plan is an overview, it will touch on every aspect of your trading system. But this also means you need not go into too much detail in those areas that will be covered by the other components of your trading system. If you are having trouble, do some research at your local library or online. You can also ask established traders for advice.
  5. Image titled Trade Binary Options Step 2
    Finalize your plan's organizational structure. Since you will actively use this document while trading, it is important that its content be organized in a way that makes sense to you. You might categorize its content so that it effectively sketches out the other components of your trading system (i.e., your trading strategy, resources, testing methods, and how you will conduct yourself when you trade). But other areas are equally important to cover. These include:
    • Conducting a self-assessment, i.e., an area that assesses your personal strengths and weaknesses and how they can be effectively leveraged for the trading endeavor.
    • Listing your trading goals and specific financial targets in a quantifiable way. For example, you should not write 'I want to make money,' but 'I want a 5% return during my first 6 months of trading.'
    • Detailing your risk and money management strategy. Here, for instance, you should lay out how much money you are willing to risk per trade, and how much of your trading account you are willing to lose before you radically re-assess your trading system.

Part 2
Composing Your Trading Strategy

  1. Image titled Trade Stocks Step 23
    Understand what a trading strategy is. A trading strategy is a detailed set of rules you follow while actually conducting stock trades. These rules can be entirely self-taught, be wholly borrowed from another trader, or be some combination of the two. It is particularly important that once you write these rules, you abide by them 100% while trading.[2] Otherwise, you will be unable to measure the success or failure of your trading strategy.
  2. Image titled Trade Stocks Step 5
    Decide on a medium. Just like a trading plan, a trading strategy can take many forms. But it is important that it be written down somewhere. Otherwise, it becomes tempting not to follow the rules it lays out.
  3. Image titled Trade Stocks Step 22
    Consider which trading rules to follow. These will be dictated by the type of market instruments and the time horizon you will trade. Get ideas by researching books on trading, as well as by visiting reputable trading sites. You can certainly borrow what has worked for others. But it is best to personalize your own set of rules as much as possible. Tailor them to suit your personality. Doing so will encourage you to faithfully follow them.
  4. Image titled Trade Stocks Step 28
    Write your trading rules in a logical manner. Use clear and concise sentences. These rules should be written almost as if you were writing software code for a computer. You not only want to ready yourself for any and all contingencies that might arise while trading. You also want to be as emotionless as possible when executing your trades.

Part 3
Gathering Your Trading Resources

  1. Image titled Trade Stocks Step 17
    Make a list of trading resources you intend to use. One resource every trader needs without exception is a broker. But other resources, like where you will get your stock market data and what screening utilities you will use to sort through it, are much more flexible. Some traders prefer to trade off of charts; others prefer to use raw Level II data. Another, less tangible, resource to consider is where you will educate yourself on trading. Your local library is your best bet, but there are plenty of reputable online resources as well.
  2. Image titled Trade Binary Options Step 1
    Investigate these resources. Since there are many brokers and different trading services available, you must make choices. Let your trading needs and objectives be your guide. For instance, if your trading account is small, you might sign up with a discount, rather than a full-service, broker. On the other hand, you might find a particular charting service well worth the price and use it instead of the many free charting services offered around the web.
  3. Image titled Trade Binary Options Step 17
    Experiment with your set of trading resources to ensure they work together. You may love the stock data stream that site X provides. But if you find it does not work well with the charting service you are using on site Y, you will need to find another. As it is unlikely that you will find a single site that provides everything you need, you should be prepared to shop around.

Part 4
Backtesting and Paper Trading

  1. Image titled Trade Binary Options Step 5
    Understand what backtesting and paper trading are. Backtesting is where you see if your trading strategy works with your trading resources and trading plan. It involves executing your strategy on past stock market data.[3] This allows you to assess under what market conditions your trading system will be the most successful. Also called forward testing, paper trading is trading in a simulated environment, even one you yourself create. It is exactly like trading for real, except you use a fake account. This gives you valuable experience when it comes time to fund your brokerage account with your own money.
  2. Image titled Trade Binary Options Step 10
    Decide how you will backtest and paper trade. While backtesting sites exist, most have a quite limited selection of testing parameters you can use to automate your testing.[4] This means that if your trading strategy does not exactly fit those parameters, backtesting will need to be conducted by hand. Likewise with paper trading, unless you opt to use a stock trading simulator. Simulators greatly differ on what they offer. Be sure they target the markets you want, and that their simulated data is acceptable to you, before you sign up. Because most simulators are not free to use.
  3. Image titled Trade Binary Options Step 4
    Backtest and paper trade your trading system until it meets your profit expectations. This might mean having to go back to adjust your trading plan, strategy and set of resources many times. Or it might mean adjusting your expectations, because the testing step is as much a test of you as a trader as it is a test of the other components. Keep a journal and be sure to record the results of all your tests.

Part 5
Live Trading

  1. Image titled Trade Binary Options Step 14
    Execute live trades exactly as you paper traded. This is easy to forget in the hectic environment of the live markets. But remember that if your trading system tested profitable, the greatest chance that it will be profitable for real is if you strictly adhere to your trading plan and strategy, and use your trading resources exactly as you intended.
  2. Image titled Trade Binary Options Step 9
    Keep records of all your trades. Your broker is obligated to do this for you for tax purposes. But develop and maintain your own system of logging trades regardless. This will give you a greater sense of ownership over your trading activity, and ease the transition if you ever decide to change brokers.
  3. Image titled Trade Binary Options Step 11
    Improve your trading system from what you learn from live trading. Live trading is listed as a separate component in a trading system because it is unlike all the others, even paper trading. Because real money is at stake, the lessons you learn in live trading are amplified 10-fold. This creates a positive feedback loop to all the other components in your trading system. In other words, live trading is effectively your trading plan in action, and the ultimate test of your trading strategy and resources.


  • Once you complete all five steps and begin to trade, understand that nothing prevents you from repeating any or all the steps again. In fact, you should expect to do so, because stock market conditions constantly change. So even if your trading system is performing as expected, you will likely find yourself returning to the planning stages at some point in the future. Stay flexible in the long term, and fine-tune your trading system accordingly.


  • While a properly tested trading system increases your chances of succeeding in the stock market, trading stocks can lead to financial ruin. But there are certain measures you can take to help ensure this does not happen.
  • Do not trade with money that is earmarked for the necessities of life, like food, clothing and shelter. If you wake up one morning and find that you have, you may have a serious problem. Trading addictions are as real as gambling addictions.[5] If you suspect you have a problem, contact an addictions specialist.
  • Always treat your trading account as money you cannot afford to lose. While your lifestyle may not be affected if you did lose it all, treating it as money you can afford to lose is a slippery slope and can quickly spiral out of control.
  • Be careful with who you trust with your money. There are plenty of unscrupulous operators running sites solely designed to part you from your hard-earned savings. It is best to stick with reputable brokers and sites that have a solid history.
  • Be realistic in your expectations, especially when you are just starting out. All traders make losing trades. Resist the temptation to chase after those losses with more money.

Article Info

Categories: Investments and Trading