What is a TRADING SYSTEM?

A trading system is a strategy based on a set of mathematical rules with which you can obtain benefits of both movements upwards as the stock market drop.

Since the stock market movements are a result of mass psychology, to predict their behaviour would lead to know the exact individual investor psychology and how it has invested. Given the impossibility to know that information, it is impossible to predict accurately how the prices vary throughout each day. This does not preclude benefit from movements in the stock market.

So, as is well known that, during each trading session, there are times of bullish or bearish trend with moments of apparent absence of trend. So, if every time trend is a movement arose to enter the market in the direction of the trend, with cessation of profits run to completion, it would be possible to benefit from these positions to compensate for the losses during harvested lack of trend periods.

It is precisely this philosophy of trading systems, which is to jump on the bandwagon of the benefits of the trend and cut losses quickly losing positions, so that the balance between winning and losing positions is positive after a sufficiently long time. To this end, various mathematical criteria are used to determine the rise and completion of a trend movement, and therefore the points of sale in the market.

Since it is not always successful when there is a tendency, and what kind, or any trading system must include a criteria to exit the market with the least loss possible, i.e., which should include a stop loss (stop loss). The choice of the value of the stop loss will depend on market behaviour and the system and should not ever be a fad, a stop loss too small will not allow the market to turn around losing positions, preventing thus its subsequent transformation into winners or less losers, while a stop loss too great only help to increase excessively the number of losing positions, so no compensation between winning and losing positions. Thus, its value must be one that leads us to balance, being exactly that statistics based on different historical market behaviour as more reliable and higher expectations of benefits.

As a trading system is a mathematical strategy will depend on mathematical parameters whose values depend in turn on several factors: historical behaviour of the market, period of the bar slot to consider intrinsic characteristics of the system ... It will therefore be required to determine these values through a comprehensive study of historical data.

Although the idea behind the operation of a trading system is simple, in practice brought to fruition his work is very difficult and complex. Most of the time we have devoted to its development has been devoted to the evidence that any system necessarily must overcome. Roughly, 3 are the tests to be performed in order to study their kindness, robustness, and reliability:

• The first, and possibly most important, is to try to answer the following question: what can we expect from a trading system in a given market? This test, called an "external evidence" is the first to perform, since that lets us know whether or not to discard a system in a certain market.
• The second one is what might be called "proof of stability of the system" and are held once set the parameters. Is intended to check whether the values we have chosen for the system parameters are stable or unstable. A system with great benefits, if it generates significant losses at certain times, could push us into the market, so their risks are too high.
• The third test would be to verify that the theoretical results obtained by the system, remains on the real market. For many tests we made with historical data, is essential to check the actual market performance to see if it behaves as we predicted.

Having overcome the relevant evidence, the system has been ready for use. One of the biggest advances in recent years has been precisely in this direction. Indeed, since thanks to the great advances in computing and telecommunications, today it is possible that they are the very systems that automatically for us to launch buy-sell orders to your broker. Thus, you become liberated from this task, being able to devote to any other activity with the assurance that the systems make money for you. When this happens it is said that the signs of the systems have been automated, and speaks instead of automatic trading systems for that of automation.