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Find a Trading System That Works for You

You may see ads for security trading systems that promise huge returns, practically no risk, and 80-percent accuracy on trade recommendations. Never forget that if it sounds too good to be true, it’s not true. There’s no guarantee that a particular trading system working today will work in the future, on the securities you like, or for you, specifically.

Beware of phony track records

If you choose to buy a trading system, be aware that crooks and charlatans are found in the technical analysis business just as they are in any other business. You can see through this financial foolishness by doing the following:

  • Get disclosure of all the indicators and rules. Also, verify results yourself by testing the system on the same historical data as the vendor’s track record. Make sure that you get data covering several years and verify that the prices shown on the vendor’s track record actually existed on each trade date.

  • Examine the vendor’s actual brokerage statements, if possible. If the vendor doesn’t trade his own system and disclose real-life results, why not? To be fair, some system designers may have some good reasons why they don’t trade their own systems, including a fondness for systems and deep dislike of the trading process.

Evaluate carefully what it means if performance results are “hypothetical.” Regulatory agencies require the hypothetical label if the vendor doesn’t have brokerage statements. But this requirement applies equally to systems published in real time for same- or next-day day execution and systems that are only curve-fitted to the past. A system that gives you trading signals, with stops and targets, for tomorrow’s market and then calculates a track record on this outcome is a better bet.

Research your security trading system

Only a few system vendors are crooks. Most are perfectly legit. Still, you want to get good value for money spent. You want

  • Original ideas that are fully disclosed: Often the vendor has a near-religious attachment to some theory of price movements that is unproven or unprovable. You’re welcome to share beliefs, but remember that technical analysis is an empirical exercise. If a belief doesn’t translate into profitable trading outcomes, why pay for it?

  • Scalability: Make sure that you can trade the system with a variable amount of money, including small amounts. Some trading systems require $50,000 or $100,000 in risk capital, amounts that are unrealistically high for a newcomer. If you buy a high-capital requirement system but then allocate too little money to it, you must cherry-pick the trades, defeating the core concept.

  • Fully defined money-management rules: Most trading systems don’t contain money-management rules and leave so much decision-making up to the user that duplicating the advertised track record is virtually impossible. At the very least, a trading system should tell you the recommended entry and exit (stop and target). An estimate of riskiness and advice on adding and subtracting from positions would be nice, too.

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