Trading system

As you may know, there are two forces that shape the market – fear and greed.  Beginners usually do not have a coherent system, apart from knowledge of a few indicators they have recently learned. Having traded for a while on a demo account they open a real one, and usually lose their entire deposit.  So why is it that when trading a demo account the trader makes “money”, and while trading the real account he loses? Main reason – with a demo account the trader is not affected by either greed or fear.  When the indicators tell him to exit the position, he calmly does so. He does not care where he “lost” or “won” because there is no real money on the line, hence he is not trading his emotions. So, in that sense, demo accounts have very little in common with real life trading. 

Now, let’s look at what is happening with a trader working with a real account funded by his or her hard-earned cash.  If the price moves in his direction, the trader is joyous, and stars counting profit. The greed mechanism is activated, and despite the fact that he would have taken the profit on a demo account, he stays in the trade because he wants to make even MORE. Eventually, the price turns around, and the potential gain disappears, oftentimes turning into a loss.  On the same token trader’s fear that the market will turn around and go against him drives the trader to close his position prematurely, thus seriously limiting the potential gain. 

Another good example of how emotions affect the judgment of a novice trader is a scenario where the price goes against him and reaches the stop-loss level right after he opens a position.  If that happened while he was trading a demo account, he would close his position and wait for another opportunity to enter. The same scenario while trading a real account is quite different – the trader hopes that the market is just about to turn around, and watches how the price moves further and further away from the intended stop-loss level, while he should have exited the position a long time ago. Finally, instead of taking a small loss, he takes a huge one (or gets a margin call and the position is closed by his broker). 

The advantage of systematic trading lies in the fact that such a system eliminates the possibility of making decisions based on emotions. If the system tells us to get out – we get out. When combined with proper position size management, systematic trading becomes a worry-free and enjoyable process.

The golden rule of trading states: “cut your losses short, and let your profits run”.  If you think about it – this rule is all about exits.  “Cut your losses short” means exit a losing trade sooner rather than later. “Let your profits run” means do not take your profit too early, and let it grow – again, an exit. A system tells you when to get in, and what’s even more important when to exit a position.