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Use the results of these paper trades to calculate your win ratio and payoff ratio. These two figures are highly important to know for any trading system. Determine what your personal win ratio and payoff ratio are in using that trading system over time.
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The trading system, your money management system and you yourself, all three of you have to gel together. Now in the case of a successful trader, it takes three to tango here. The more profitable you will be over time, the stronger and more developed the relationship is between the three of you. So you have to develop not only a trading system but also a money management plan that suits your personality.
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So for you to become a successful trader, a trading system is not enough. You need a good money management plan as well. Win ratio and the payoff ratio are required in developing a sound money management plan that will work hand in hand with that trading system. What can be the best parameters to selecting your trading system? When selecting your trading system, use these five parameters:
1) The trading system is analytical. Trade entries in the trading system are defined by market price activity, key support and resistance levels, volume and volatility dynamics and not on random and spontaneous decisions.
2) The initial stop loss exit is determined before entering your trade.
3) The trading system that you select is rule based. Just like the trade entries, the trading system determines the trade exits by market price activity, key support and resistance levels, volume and volatility dynamics and fundamental rules, not on any arbitrary dollar loss that you feel comfortable with.
4) You must not underestimate the importance of paper trading though it is not a substitute for live trading. Your trading system has been adequately paper traded or live traded and you have determined your personal statistical performance. You need to know your win ratio and the payoff ratio.
Do not rely on the results that the other got with that trading system. Use the actual results that you attained while using that trading system in calculating your win ratio and the payoff ratio.
You can use a computer in testing the performance of a trading system. Again do not delude yourself by thinking that computer back testing can give you your win ratio or payoff ratio. Do not try to rely on computer back tested results. Your personal performance results are the real results that matter. You cannot depend on computer results and other traders results.
5) Your trading rules should be written out step by step in sequence so that the entries and exits are consistent, clear and above all quantifiable.
One perfect example of a rule based trading system is the Turtle Trading System. This system was developed for the commodities futures market.
The story of Turtle trading rules is very interesting. You must know the story of Turtle Trading Rules. The creators of that trading system had a discussion one day. One master was of the opinion that great traders can be made. The other master said great traders are only born.
Both the great masters had a bet. Advertisements were placed in the Wall Street Journal and the Barrons. After short listing, a number of completely new traders were selected to teach them those rules and see if they could become successful traders. Many succeeded with the turtle trading system and became highly successful traders. But only those succeeded who had the discipline to consistently apply the Turtle Trading Rules while trading.
