Trading Pyramid - System Parameters

In the market there are two types of risk. There is the risk of losing money and there is the risk of losing a lot of money. As there are no free lunches you can expect the trading vehicles(options and futures) which we are discussing to offer a balance against these two types or risk and this is what we find. To using those vehicles, there are something you must know before you do anyting.

1. You need to define your objectives.
2. Therefrom you get your trending signal.
3. You must then decide on your Money Management system – this is critical.
4. The Money Management system tells you how much you can risk on each trade and from this you can decide on your stop policy and position size.
5. You must then decide on your entry strategy.
6. The next step is how to move your stop as the trade progresses.
7. Finally you will want an exit strategy, although this may simply be to wait for the stop to be hit.

There are of course two sides to trading. The first is the theory, and this is where the simple rules come in. The second is the practice and this is where the human brain (including all emotional and instinctive input) comes in. The formula is simple:

Simple Trading Rules + Human Brain = Chaos and Confusion

Anyone who has ever traded knows the truth of this formula.

So here come the simple rules. If your trading approach lets profits run and cuts losses short and if it achieves a 50 per cent hit rate then overall you will win. This is clearly so. For each profit there will be a loss, but as profits are allowed to run they will average a larger sum than the losses, which are always kept small.

The purpose of analysis (technical or fundamental) is not to analyze markets, it is to build your system/trading approach. This is not to denigrate Technical Analysis because building your system is an essential step to success. The reason I know that you need a system is because of that formula I just mentioned before. A system does produce simple trading rules. Anything else is going to be more complicated. I might summarize this as:

If Simple Trading Rules + Human Brain = Chaos and Confusion Then Complex Trading Rules + Human Brain = ?