Good vs Evil – The Battle Between Trading Systems & Trading Strategies

Unfortunately today there are many people who still search for the ‘holy grail’ of trading. The system or plan that will result in no losses big profits and total ‘set and forget’ automation. Whilst trading to a certain degree can be ‘automated’ (something I’ll touch on another time), the fact of the matter is that if you want ‘easy’ money, trading the markets is the wrong place to look.

Even with this advice there are many people, some of who may be reading this post right now that are either using or looking to use the coolest, whizz-bang trading system with dollar signs in their eyes. But ultimately they will fail and lose a lot of money in the process.

Let me be upfront about this – Trading systems are bad, evil creatures. Trading methods or strategies are the cornerstone to every successful trader.

So what is a trading system?

A trading system is essentially a set of static or lagging tools applied to a market or stock with the intention to enter a position with no concern as to the dynamics or unfolding of the market or stock. This is different from a mechanical system as even solid mechanical systems – those that any should be using when they first start out are built on the basis of trading methodologies derived from the dynamics of financial markets and the ebbs and flows of rising and falling prices.

Trading systems do not take into account price action and this is where the problem lies. The unfolding of price action and your willingness to understand this unfolding is what tells you with high probability the future direction of the market you are studying.

Trading systems are generally based on the compliance of two key factors. For example a shorter term exponential moving average crossing over a longer term exponential moving average. The cross over point is the signal to either buy or sell depending on the direction at which the cross over occurs. That’s it. No support/resistance, no consideration for price action – just two lines crossing.

Don’t get me wrong, the use of moving averages have a place in trading – I personally use them in my short term trading but I do so as an additional probability indicator – not a stand-alone trading system on top of which all my entries and exits are based.

Yes – there are people out there who promote this stupid stuff. Some of you may remember a crocodile Dundee dressing guy by the name of ‘Aussie Rob’ and his company ‘Lifestyle Trader’ – both of which have disappeared into the ether – just like the Crocodile Dundee sequels.

If you believe that a trading system will bring you the riches you desire then your simply a gambler and not a true trader.

Trading systems do not take into account the dynamics of the market. Most notably the fact that markets rise, fall and go sideways. This where a trader using a well-tested trading method or strategy comes into their own. A trader using a solid trading strategy bases their entries and exits on the foundation of the underlying market movement or price action. By having a solid understanding of the markets you prefer to trade you get a feel for the direction said market is likely to head based on the current price action at hand.  As such, your in control of whether you buy or sell – not some silly indicator.

Gaining these skills – the ability to make trading decisions is not an easy path – it will take time. But nothing worth achieving ever comes easy and in the long run you are far better off to trade on the faith of your own dynamic trading strategy than relying two lines crossing over on your screen.

Trading strategies are the path to trading glory.

Put simply a trading strategy is a decision based methodology founded on price action, logic and probability.

OK so maybe that wasn’t so simple – what I’m getting at here is that a trading strategy is founded on the underlying price action of the market – the way price unfolds. If you can recognize certain patterns within this price action and the likelihood of future direction based on these patterns then you have the makings of a sound trading strategy.

For example I use a short term trading strategy on several currencies as well as gold and silver that is based around the three core trading methodologies of price, pattern and time. I use confirmation of certain candlestick patterns as my entry strategy, support and resistance to confirm where buyers and sellers are likely to enter the market based on my prediction for direction and finally time to add probability to prediction of direction by looking at where in the current cycle (whether bullish or bearish) the current market lies.

I will only take a trade if two out of three of these align – generally price and pattern. A trading signal may appear yet underlying support or resistance are not present or on the flipside a support or resistance level may be hit yet my trading signal does not appear. In these instances I simply don’t trade. My trading ‘edge’ is not apparent and therefore there is too much risk and too little probability in me taking a trade at this time.

Yes, a trading system may be harder to implement and understand, simply because you as the trader need to understand the market but I would much rather rely on myself and my ability than what a static trading system tells me.

Blake Sterling
Wealth Within