Create a Profitable Trading System for Successful Investing

Have you ever wanted to put the power of a computer to work when making investing decisions? Would you like a computer to take care of the actual buying and selling actions for you? The capability exists! You can create a trading system that will not only choose which stocks to buy and sell based on rules you create, but it will also execute the orders.

Nonetheless the technology exists today to create your own trading system, using criteria of your choosing.


There are several advantages to using an automated trading system:

1. You know the calculations are accurate. The computer does all the calculating for you. Therefore metrics are provided by the investing service. The numbers are correct and the calculations are accurate.
‣ You can’t fat-finger a number and throw off your entire investing system. Automated trading systems eliminate human error.

2. There’s less stress. You don’t have to worry about monitoring your positions every 10 minutes. In contrast criteria of your trading system are met, the trades will be executed without your involvement.
‣ The computer constantly evaluates your investments. Therefore, your primary role becomes monitoring your system.
‣ The computer takes on the heavy lifting. You can enjoy your lunch without worrying if your investments are sinking by the minute.

3. Investing in multiple markets becomes possible. Therefore, you can trade around the world, regardless of time zones, with an automated system. Could you do it manually? Yes, but the amount of work involved is staggering. Imagine investing in Hong Kong while you sleep. The entire world opens up to you in real time.

4. Emotion is removed from the equation. When the targets are met, a buy or sell occurs. It’s that simple. How often have you wrongly purchased or sold a stock based on gut instinct? The computer doesn’t have emotions. It has calculations.

5. It’s easy to back-test your pet theories. Suppose you’ve always had a pet theory about investing that you’d like to test, but you don’t want to apply a simulation starting with the market today. It would take years to reach a reasonable conclusion.
‣ It’s possible to test your theory on the past. You can look at the last 10 years, or more, and have an answer almost instantly. Thus past doesn’t necessarily equal the future, but it’s a good place to start.
‣ You can simulate thousands of trades in a few seconds and determine if your theory has legs.
An automated trading system can be powerful and reduce your workload considerably. Allow the computer to do the grunt work while you spend your time on analysis that doesn’t involve so many numbers. You can focus on industry news, management teams, and strategic issues.


Automated trading systems also have disadvantages:

1. Automated trading has its limitations. It cannot account for every variable, such as the possibility of the government discontinuing solar panel subsidies in half a year or IBM facing a new contender.
‣ This is one reason why a semi-automatic trading platform may be preferred, which will be addressed shortly.

2. Maintaining trading systems is essential. While this is not necessarily a drawback, many investors overlook it. A set of trading rules has a limited lifespan and will eventually become ineffective. As market conditions evolve, your strategy must also adapt. Although there are few downsides to automated trading, it is crucial to comprehend them.


There are two options for automated trading systems:

1. Fully automatic. These systems will find the trades that meet your programmed criteria and execute the trades.
‣ The emotion of trading is removed. The amount of time spent executing trades is also lowered.
‣ On the downside, it’s easy to lose a lot of money before you realize it if your trading rules aren’t up to snuff.
‣ Popular examples include: TradeStation, Alvatest, and Wealthlab

2. Semi-automatic. This type of system will provide a notification and a list of trades that meet your criteria, but you must execute the trades manually.
‣ The heavy work is done for you, but you still have the final say whether a trade is executed or not.
‣ Examples of semi-automatic trading platforms include AmiBroker and Tradecision.
Many investors prefer semi-automatic systems. The computer can provide a list of companies that fit your trading rules. You can then perform additional analysis to see if you want to continue with the trade. Fully automatic systems pull the trigger for you.

Establishing your first trading system can range from effortless to arduous. The highly flexible platforms may demand advanced programming expertise. Even though the programming language is straightforward, those inexperienced with programming might face challenges.

If you’re not interested in programming, you can hire a programmer or stick with a simpler platform.


1. Choose your trading platform. There are two primary decisions to make:
‣ Fully automatic or semi-automatic? Consider which fits in with your investing objectives and comfort level.
‣ Which brokerage service do you prefer? The automated trading service is typically an add-on. It executes trades through your brokerage service. Each automated trading service only works with certain brokerages. You may have to make a compromise on one or the other.

2. Determine your trading rules. You can make your criteria as complex as you’d like, but there are always four primary rules:
‣ Sell. This is when you want the system to sell a position.
‣ Buy. When do you want the system to make a purchase?
‣ Target. When do you want to sell a current stock based on the gain it’s achieved?
‣ Stop. This is a sell order based on the current loss the stock is experiencing.

3. Choose the metrics for each trading rule. You have a lot of options to base your trading decisions upon. You can use a single metric for a decision or use multiple metrics. For example:
‣ Upon the occurrence of the 60-day moving average dropping below the 180-day moving average, make sure to sell 100 shares of the stock.
‣ Buy 100 shares of stock if the price drops by 10% or more in a 60-day period, plus the US dollar has gained at least 2% versus the Euro, plus the market capitalization for the company is at least $1 billion, plus the stock is priced at less than $10 per share.

4. Create the code. This part can be easy or challenging, depending on the platform and your programming knowledge. Some platforms cater to the average person.
‣ Others require you to code something like this : {SetOrder(OP_BUY,Lots,Ask,3,0,Ask+TakeProfit*Point)}
‣Learning programming is achievable, however it demands a substantial time commitment.

5. Thoroughly testing your trading system is crucial. If you have ever doubted the importance of testing your work, it is essential to reconsider. Every platform offers a unique set of testing tools, including those that identify typographical errors, such as missed brackets, and others that detect logical problems.

6. Perform back-testing with historical data to assess the efficacy of your trading formulas in real-world scenarios. You can apply your rules to past data and analyze the outcomes. Remember that what may not have worked two decades ago may not work today, given the rapid evolution of the world and its inhabitants. Nonetheless, it’s worth exploring as you never know what might work.
‣ Feel free to optimize your formulas as you deem appropriate. Be sure to take into account any market changes that may have occurred between the time of your test data and the present moment.  It’s crucial to remember that the past may not necessarily mirror the present or future.
‣ Ensure the historical data you select comes from a period with similar market conditions.

7. Start trading with caution, using lower limits on your buying and selling strategies at first. Verify that everything is functioning correctly before deploying your system in the market. Remember that there may be unforeseen exceptions that you may have overlooked.


By developing a trading system, you can eliminate a significant amount of workload. This lets you focus on non-numeric analysis while the computer handles the rest. However, ensure to conduct thorough testing of your system, as a small error can result in significant losses in a short period.

Whereas testing historical data is a straightforward way to verify the functionality of your trading system. Therefore, take your time and leverage your computational power to enhance your investment endeavors.

You can also check our blog on Withdrawing Your Traditional IRA Funds


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