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Building a trading system

To control risk, our main goal as traders, we need to be sticklers about our trading system components and verify that we have a setup that is in accordance to our risk appetite and low on risk in regards to the components functionality themselves

the following is an attempt to illustrate how a basic system from its components perspective could look like to have a high functionality in regards to a low risk approach

The following picture of an excel sheet points out some of the main components to be considered:

column A requires a blend of markets that allows for the trader to have choices to trade less related markets-your goal should be to have at least 4 markets to entail one sector pair for relative weakness/relative strength options and still keep the list to a minimum to not overwhelm the trader with too much data

column C requires the trader to look for exchanges that are partially determined of his or her location and should provide security in regards to risk based on regulation, Clearing house security and an overall hedge to not have all ones capital exposed in one spot

column E depicts ones choice what instrument at what exchange is traded for the specific markets of column A

be aware of the significance of this column-it will determine the minimum trading size

since you need to diversify an instruments trades through time frames and this in consequence determining trading size, it is essential to think it through what your max stop sizes are for the various time frames

e.g.: if picking futures-the most professional market= low risk, for ES for example, the regular size contract has as the smallest tick size increment a value of $12.50 per tick.

Should you for a daily trade require in consequence a 5 point stop(one point = 4 ticks), your smallest risk per contract would be $250

in the case of trading a quad exit this would equal for a minimum of 4 contracts a minimum risk of $1000

This in turn would require a minimum of a 50k trading account based on the max 2% rule of max position size to not violate the max drawdown rule of max27%

trading four different markets with the possibility to have multiple trades on at the same time in turn requires a 200k minimum trading account

and this just for starters(no reload and left over runners considered)

meaning it is prudent to be very smart about ones choices since factors like liquidity and so forth come into play here as well

we picked micro contracts respectively to show that one can reduce personal risk appetite if needed

picking micro contracts in this example shows in column G how risk can be reduced by a factor of 10

column I illustrates the individual tick value of each instruments which allows to measure typical movement of each instrument to adjust size between the instruments for balancing a tempered portfolio-and to adjust an equilibrium between related instruments should they have beta

column K has data ready for roll overs to adjust ones Domes

Column T helps identifying ones trading times for ones trading style and needs a refined column of when one actually chooses to initiate trades

Column W which shows maintenance margin is imperative to determine actual risk of positions per $ size of ones trading capital in use

in part 2 of this series we will go into more details and columns needed to setup a basic low risk system

here are some resources for part 1 of this series:


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