High Probability Trading Systems - 6 Vital Keys To A Great Trading System

This article is the key to understanding how great traders think in terms of systems. This is vitally crucial if you want real success as a trader or an investor, no matter which market you choose. Once you come to understand the following 6 keys and are able to employ them in developing trading systems, great wealth will comes in leaps and bounds to you and I really mean it. Therefore do carefully read this article, for it will greatly benefit you shall you choose to use this power.

1) Reliability or what percentage of time you make money

For example, do you make money on 60 percent of your investments and lose money on 40 percent of them? Although it is not necessary that you will win money if you winning percentage is above 50 percent and vice versa, it would be better if you had a greater than 50 percent win rate, if and only if, your wins are always greater than your loss. And that is the next key.

2) The relative size of your profits compared to your losses

For example, you have designed your system that for every win you make $200 and every loss you lose $100 and you do not take off the trade only until either of these 2 targets are hit. This means for every 1 win and 1 loss, you will still be ahead by $100. Therefore if your system has a reliability rate of at least 50 percent and every win you make is more than every loss you get, without a doubt, you will make money in the long run (not including all other costs).

3) Your cost of making an investment or trade

This is the destructive force on your account size whenever you trade. It's your execution costs and your brokerage commissions. These costs can really accumulate over many trades. Therefore you have to take into consideration all the other cost you will incur when taking the trade.

4) How often you get the opportunity to trade

Now imagine holding the first three variables constant. Their combined effect would then depend on how often you trade. The results will be much different if you make 100 trades each day compared with 100 trades each year.

5) Your position-sizing model or how many units you trade at one time

Obviously, the amount you win or lose per share is multiplied by the number of shares you trade.

6) The size of you trading-investing capital

The effect of the first four variables on your account depends significantly on the size of your account. For example, the cost of trading will have a significantly greater effect on a $1000 account than it will on a million dollar account. If it costs $20 to trade, then you would take a 2 percent hit on each trade in the $1000 account before you'd make a profit. As a result, you'd have to average more than 2 percent profit per trade just to cover the cost of trading. However, the impact of the same $20 in costs becomes insignificant (that is, 0.002 percent) if you have a million dollar account. Similarly, a $500 loss will decimate a $1000 account, but it will have almost no effect (that is, 0.05 percent) on a million dollar account.

These 6 keys are all vitally important to your success as a trader and to have a high probability trading system. Whether you choose to incorporate all 6 into your trading system or just a single key is really up to you. However it is crucial to test your system to see whether it works. I hoped you have enjoyed this article on how you can develop your own high probability trading system. I wish you good trading!

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