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8 Steps to building a Trading System (Thread)

🧵

 Individuals must keep their personality, lifestyle, and risk appetite at the forefront of their minds when building their trading system.

In this thread we will break down the components of a successful trading system for consistent returns in the markets 👇
Components of a Successful Trading System

1. Market
2. Time Frame
3. Edges
4. Entry Tactics
5. Setups
6. Rules & Risk Management
7. Journaling
8. Post Trade Analysis
Let's discuss the first component, The Market.

The financial markets are divided into the following 👇

1. Equity
2. Bond
3. Futures
4. Forex
5. Commodity

Each market requires a different set of knowledge, skill, experience, and know-how.
Once you know which type of Market you want to trade, you must now choose your Time Frame.

Day Trade
Swing Trade
Position Trade
Combination of all the above

Time Frame often aligns with a traders personality, lifestyle, goals. 🧠
Day Traders ⌛

Often times day traders use a lower time frame to buy/sell in their respective market. This usually corresponds with an intraday chart (1 minute, 5 minute, 15 minute, etc) all the way up to a daily chart.
The appeal of day trading is that by executing all of your trades during the session, you remove any overnight risk.

You may miss out on bigger moves, but it may be easier to sleep at night knowing you have no money at risk.
Swing Traders 📆

Swing traders will primarily focus on the daily/weekly charts, accepting the overnight risk & play for a bigger move over the span of a couple days to a couple of weeks.

Executions usually occur on a lower time frame with the longer term trend in mind.
Position Traders 🧘

Position Traders are also using the daily/weekly timeframes, but add in the monthly as well.

These traders are looking to hold on to their positions for multiple weeks to months.
Combination of the 3

When identifying your style in the markets, it is normal to try out different time frames & see what works best for your personality.

The only thing that matters in the market is extracting an income over a large sample size, how you do it is up to you.
We can extract income from the markets over a large sample size only if we are acting using the next requirement in a trading system: Edge.

According to Mark Douglas, "An edge is nothing more than an indication of a higher probability of one thing happening over another."
So, how do we get an Edge in the market?

This comes from repetitive study of patterns seen in the biggest winners from the market and the timeframe that you are trading.

You have to understand the common themes that each winner displayed before they run up in price.
An example of an Edge in the equity markets is CANSLIM, a system created by William O'Neil.

WON was able to create and build CANSLIM by looking at the Fundamentals & Technicals of the strongest winning stocks of his time, building a set of concrete rules to catch these moves.
If you want to learn more about CANSLIM, take a look at our thread here 👇https://t.co/wm5dux912o
Once we have an edge, we then identify a Setup. with that edge.

To do this, we need to have defined criteria that allows us to manage our risk so that if the trade goes against us, we don't lose all of our capital.

Managing risk is the most important part of a Setup.
Risk Management

This is the most important part of any system in any market. Without proper risk management, you are susceptible to unnecessary drawdowns leading to emotional swings.
What does proper risk management look like?

There are many different ways to approach this area of a system, but the most simplistic form of defining your risk parameters looks like this:

- Rules
- Proper position sizing
- Risk/reward ratio
Rules

Rules act as guardrails to make sure your behaviors in the market are contained and repeatable.

Trading is an emotional game. Rules help prevent you from damaging yourself when things may feel out of control.
Examples of rules:

3 losses in a row = a multi-day break.

During a Market Downtrend (below 21ema) = look for shorts more than longs

Taking x amount of days off per year to BUILD mental capital.

No big losses = having a MAX, non-negotiable stop loss for every single trade.
When creating your rule set, you want to make sure it is not too restrictive. We want to be able to operate in a flow state & having too many rules may prevent this from happening
Proper Position Sizing

We want to make sure our exposure is large enough to make significant progress in our overall account but also small enough to keep losses in control when we are stopped out

Traders are wrong more than they are right, so position sizing correctly is key.
There are many ways to determine your position sizing, but a simple one to make sure you don't lose all of your account in one trade is to risk 0.5-1% of your equity per trade as a MAX stop loss.

You would have to lose on 10-20 trades in a row to lose 10% of your account.
A 10% drawdown sounds scary, but it is important to note that we still live to fight another day with this method.

On e of the major key to super-performance is to never let your account value fall too far from all time highs
Risk Reward Ratio

You always want to make sure your gains are at least 2-3x your losses. If you are risking $100 on a loser, you want to be making $200-300 on your winners.

Following these parameters means you can be right only 1/3 times and still not lose money.
It is also important to learn when to both ramp up or scale back your exposure in response to the current market environment.

This skill comes with experience but is an important part to super performance.
Journaling

When trading any market, it is essential for you to understand how your emotions impact your overall trading

To accurately track this and learn from your emotions, you need to write down what is going on in your brain during the trading session.
Some easy things to keep track of are:

- Feelings premarket
- Intraday executions, with reasoning and edge defined
- Emotional swings during the day
- Grading your trading execution post market.
By continuing to build a database of these points, you will be able to connect your current state in the market to past states. This will allow you to perform better over time as your brain builds pathways, leading to better execution and decision making.
The last part of any successful trading system is Post Trade Analysis.

PTA helps you see what is working vs. what is not working.

It acts as a report card.

This is when we need to be the most honest with ourselves in our trading.
Think about how athletes study their best and worst games. This allows them to identify tweaks and improvements that need to be made

In may be painful to go through past losses but sometimes looking back on your past trades is the only way to catch flaws in your decision making.
How to do PTA:

- Tracking win rate on a per edge basis (is your edge working more than others)
- Avg gain/loss
- Batting average
- How you handle losing streaks (do they get worse, do you stop trading, etc.)

The outcome of PTA should be an improved system overall.
Regardless of your strategy or timeframe your system must incorporate the 8 components we have described above.

What component do you think is the most important?

Let us know your thoughts below 👇
If you enjoyed this thread make sure to follow @TraderLion_ and retweet 🔁this quoted tweet

https://t.co/C7fXaDuNmF

More from TraderLion 🦁

TraderLion \U0001f981
TraderLion 🦁
@TraderLion_
3 Simple Steps to Quickly Grow a Small Trading Account

--- Thread 🧵 ---

1️⃣ Define a Repeatable Edge

A basis of any successful trading system is having an edge over a series of trades.

Without a well studied edge, you cannot succeed in the market.

Example of edges:

Trend system
* Trading during the power trend
* Trading stocks that are in uptrends
* Trading GROUPS that are in uptrends

High Volume Edges
* Highest Volume Ever (HVE)
* Highest Volume in > 1 Year (HV1)
* Highest Volume Since IPO (HVIPO)

2️⃣ Define Entry Tactics from that Edge

Once you have an edge, you need an entry tactic.

Entry tactics are repeatable and definable. You should know your entry and exit points before ever placing a trade.

Examples of entry tactics:

Trend system
🟢 Enter on two closes above a KMA
🔴 Exit on two closes below a KMA

High Volume Edge
📊 High Volume Close
📊 High Volume Support

Edges & Entry tactics have to be repeated CONSISTENTLY to reduce randomness when trading a small account.
TRADERLION
TraderLion
TraderLion
@TraderLion_
How to identify the next Market Leaders (Thread)

After a basing/corrective period in the market, new merchandise will start to emerge and show itself as the market is setting up for another uptrend.

Some leaders from the previous run may continue their moves, but often it's the new leaders which will provide the most alpha.

So keep an open mind and search for the stocks that are standing out from the crowd with the strongest combination of superior price + volume action and fundamentals.

Here is how to find these next leaders:

First, market leaders by definition lead the market. They will often be making new price and relative strength highs as the market starts moving up from a potential bottom.

Keep an eye on Relative Strength Lines especially. A Relative Strength New High Before Price is a key Leadership Blueprint. For instance, $TSLA showed this characteristic before advancing 350% in 2020

The RS Line is calculated by the Price of the stock/ SPX
ALL , TRADERLION
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TraderLion \U0001f981
TraderLion 🦁
@TraderLion_
Building a Daily & Weekly Routine Workflow to Increase Profitability

--- Thread 🧵 ---

The stock market is one of the most complex systems in the world, with parts that change every single second.

As individual investors, we need to bring a level of consistency to our system that can prevent us from feeling overwhelmed.

Routines offer this consistency.

As a retail trader/investor, you must have a set routine for your daily review and weekend review.

This is non-negotiable if you want to outperform the market or increase your current levels of profitability.

In your Daily Routine, you should review the following 👇

🔹 General Markets
🔹 Current Positions
🔹 Emotional Review
🔹 Focus List
🔹 Summary


General Markets (10 min)

The goal is to identify if the wind is at our backs.

You should note whether there has been a recent cluster of accumulation/distribution, where price is with respect to the KMAs, & the index's relationship to the highs.
TRADERLION
TraderLion \U0001f981
TraderLion 🦁
@TraderLion_
A Guide to Position Sizing

--- Thread 🧵 ---

To perform in the market, position sizing needs to be the main focus.

This is what ultimately separates the good from the great.

It will make no difference on your account if you have a 100% gain in a name with only 1% of your equity.

It will make a huge difference on your account if you have a 100% gain in a name with 20%+ of your equity.

There are 2 consistent ways to position size in the markets 👇

1️⃣ Position Size Based on Risk
2️⃣ Position Size Based on Number of Edges

1️⃣ Position Size Based on Risk

Before you take a position in a stock, you must know how much you are willing to lose on a trade.

We recommend never risking more than 1% of your overall account equity on any single trade, especially if you are in the consistency phase.
TRADERLION
TraderLion \U0001f981
TraderLion 🦁
@TraderLion_
How Stage Analysis can improve your Trading & Investing 📈📉

Thread🧵

👇

Stan Weinstein's Stage Analysis offers traders a powerful methodology to identify trends in the markets while following strict risk management principles.

1/


First, let's review who Stan Weinstein is and his contributions to the market.

Weinstein is a veteran technical trader who has over 50 years of experience and now works as an advisor for institutional investors.

2/

Stan is well known for authoring "Secrets for Profiting in Bull & Bear Markets" which you can find at the link below.

This book is incredibly well written and gets into the nitty-gritty of his processes in the

So, what is Stage Analysis?

Stage Analysis is used to identify the longer-term trend of a stock or index. There are 4 different stages 👇

The Basing Area, Advancing Phase, The Top Area, and Declining Phase.

4/
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@TraderLion_
What is the biggest challenge that traders face?

It's not the market. It's not the competition. The biggest challenge traders face is themselves.

That's why we've put together this list of five short lessons that will help you overcome your next trading obstacle:

1. You need to be disciplined enough to wait for the perfect opportunity.

Successful Traders:

❌ They don't force trades or take unnecessary risks.

✅ They wait patiently for the market to provide them with a high-probability setup before entering a trade.

2. You need to only take calculated risks.

Successful Traders:

❌ They don't take irrational risks or blindly follow the herd.

✅ They make calculated decisions based on their analysis and plan.

3. You must be able to accept losses.

Successful Traders:

❌ They don't try to avoid losses at all costs.

✅ They know that losses are a part of trading and accept them as part of the process.

4. You need to have a defined edge.

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✅ They have a defined edge that they execute repeatedly.
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How to time the market (thread)

There is the old saying that “Time in the market beats timing the market” The chart below from Dr. Wish’s @WishingWealth presentation at the @TraderLion_ conference shows that to be false.

Full presentation: https://t.co/o2f21GBXci


The green line is unattainable realistically, however, missing volatile times during corrections yields better performance than buy and hold and we can aim for the green line.

Investors usually only show the gray and red results.

More

There are many strategies for investing/trading in the stock market operating within different timeframes and with different objectives.

That is of course what creates a market and opportunity. Timing the market may not be what works for you or what fits your goals/lifestyle.

However, everyone involved in the market is here to make money over time and corrections can cause huge drawdowns in the high alpha names negating incredible performance during strong market uptrends.
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An Introduction to Price and Volume Action (thread)

An understanding of price and volume action is essential for judging supply and demand characteristics. This allows you to determine whether a stock is under accumulation or distribution and find proper buy and sell points

This thread is not about memorizing candlestick patterns, but instead understanding how supply and demand create patterns over and over again. The Stock Market is an auction, and the large buyers and sellers leave clues for us to find within price and volume.

Let’s start with one price bar. I personally use OHLC charts but feel free to use what makes sense to you, they each present the same information. A single bar can represent a minute, 15 minutes, a day, or a year. The higher the timeframe the more meaningful the price move.


I view each bar as a match of tug of war between the buyers and the sellers. Buying pressure tries to pull the stock price up while selling pressure tries to pull it down. The winner is reflected in the closing range.
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TraderLion
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What to do if you are not trading well. (Thread)

Impatience and instant success are built into our minds from the get-go. We want instant wins and instant rewards.

This has as much to do with our psychological build-up as it does with the society we live in.

In this thread, we will cover:

What to do if you are not trading well.
How to stop the drawdowns when no progress is being made.
How to have a systematic process that protects you from yourself.

So what is it that drives us?

We all want the market to reward us for our hard work, the effort, and time we put into it.

We want input to equal output.

However, there is no such thing as input = output in trading.

Trading is about consistency, persistence, and hard work without the certainty of any reward.
TRADERLION
TraderLion \U0001f981
TraderLion 🦁
@TraderLion_
Top 7 Things You Must Do Differently to Achieve Massive Success as a Trader by Jesse Stine

(Jesse turned $46,000 into $6.8M in 28 months, netting him a return of 14,972%)

🧵👇


Learn How to Sell

🔹 "Most investors spend 99% of their time studying what to buy and when to buy it."
🔹 "If you don't become passionate about the art of selling, you might continually lose a majority of your gains."
🔹"Fear is NOT a profitable sell signal"

Focus on Weekly and Monthly Charts

🔹"Smart money billion dollar hedge funds and institutions base their buy and sell decisions almost exclusively on longer-term weekly and monthly charts."

To make big money, we have to know what big money is doing.

Wait Until Everything Lines Up

🔹"There's only one way to put yourself in a position to hit a grand slam. Wait, wait, & wait some more until most of the technicals line up in your favor. By waiting until EVERYTHING lines up, your odds of massive success go through the roof."

Invest on an Island

🔹"Ignore the noise and make your own decisions."
🔹"By eliminating all the 'noise', you open up the possibility of massive success."
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