How to use a trading system to take emotion out of trading

Emotion is an inevitable part of trading. It’s something you can never completely remove from the equation, which is why you have to find a system to manage it so it won’t cloud your judgment while trading.

As the market rises, many are tempted to stay in a trade they maybe shouldn’t have, and in the same way, a falling market can induce fear and prompt us to leave too early. 

Having a trading system helps us counter that urge. It’s a plan to follow rigidly so you don’t have to observe and draw conclusions while you’re emotionally invested in a trade. 

It gives us the edge to succeed in the long term.

Why use a trading system?

Trading successfully means having considered everything before entering a trade. This will give the well-prepared trader an arsenal of trades each month that he can choose from, no matter if the market is going up, down or sideways. He can go in with laser like precision, pick the optimal entry and exit points, and leave without spending more time in the market than he has to. 

When following a system, you will still get emotional. It is impossible to not be. However, a trading system allows you to trade while you’re in an emotional state and still be able to know what to do next without having to analyse the market at that moment. Observing and analysing while emotionally attached to a trade will likely cloud your judgement and result in poor decision making.  

How to build a trading system that will work for you

Step 1: Pick a hypothesis

A trading system works best when it has been quant architected, mathematically created and built from the ground up. A system built on data is the most likely to hold up when trading long term. 

The first step is to create a hypothesis. This hypothesis could be based on your experiences or observations, or it could have been something you have read. 

The next step is to pick a strategy. How do you want to trade based on this hypothesis? This is how you test whether you’re right about your view or not. 

The important ingredients in a trading system

• Profit in any market: Make money if the market moves up or down
• Reduce exposure: Less time in the market and optimised entries
• Take out emotion: Mechanical entries mean you buy if the market is up and short if it’s down.
• Scale to any market: Can be used on any asset on any exchange with minor tweaks.
• Quant-architected: Mathematically created and built from the ground up.
• Simple to use: Step-by-step rules to easily follow and define your entries and exits. 

Step 2. Test the system 

Testing the hypothesis will show you whether or not you were right about your view. You do that by optimising it to get the best possible result out of it, which will either prove or disprove it. 

Disproving it is just as important as proving it. It’s not important to be right. Being wrong will also get you the data you need to help you build your trading system. Once you have tested your hypothesis and attained the data you’ll need, it’s time to set up your rules. 

Step 3. Set up your rules

When in a trade, it is not the time to be thinking about or observing information and drawing conclusions. Those conclusions should have been drawn in previous steps, when testing the hypothesis and setting up the rules. 

The point of setting up rules is to create a system which you can follow step-by-step to know exactly what to do when in the trade. It’s this part that essentially allows you to leave your brain behind and trade mechanically – because you already know exactly what to do.  

The LITT Trading system

Data is the backbone of our trading systems. Our simplest trading system is Leading Indicator Trend Trading (LITT) System which is a quant-tested system with Implied Volatility data going back three years. It was built from the ground up and focussed on making money in bullish and bearish markets. 

 

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