Opening Position by Jayanthi Gopalakrishnan
Last time, we covered the basics of what a system is, why you need one, and how to find one. This time, you will learn how to design and test a system, whether it is your own or someone elseís.
The steps to building a system are simple. They are: Find the right indicator. Design your setups, and determine when to buy, when to sell if youíre right, and when to sell if youíre wrong. Test the system. And finally, analyze the results. Thatís about it. It sounds easy when I put it that way, doesnít it? Well, itís not really difficult; itís just tedious. But hereís why you need to go through it all.
FIND THE RIGHT INDICATOR(S)
Many traders like to put a variety of indicators and/or systems on their charts in the hope that the more they add, the more likely they are to capture profits. Unfortunately, that is the least likely approach to capturing real-time profits. While indicators on charts look great, when you are reading a chart as it is forming, it is difficult to tell what the market might do next. So how do you find out?
Knowing there is money to be made going long and short because of the potential hourly wage (PHW) analysis (as explained in my June 2012 article) in the choppy market presented in Figure 1, we must determine what approach will net us something close to the 40% PHW number calculated.
I like to leave the yellow-dot indicator on my chart while I am conducting research and I am trading to remind myself to examine just how close I am getting to the ideal. The problem becomes one of finding an indicator or pattern that gives us close approximations to the yellow dots. If we find an indicator that gives more signals than the ideal, thatís okay. We can always weed out extraneous signals with filters and pare back to the optimal dots configuration.