There are generally two types of traders and they are categorized as using a technical analysis type of swing trading system or a more fundamental analysis type.

Those that use a fundamental trading system focus on the cause of price movements while technical traders focus on the charts and the price movement. Fundamentalists look at the macroeconomic indicators such as interest rates, employment rate and the general health of the economies.

Trading systems that rely on technical analysis use historical price data from the charts and attempt to forecast the future behaviour or direction of price. These traders believe that all current information about the market is already factored in on the current price. Regardless of the trading system you look to use, remember that there is more than one way to take money from the market.

There are many indicators that are used in technical trading systems. Some of the more popular ones are trend lines, Fibonacci, Stochastic oscillator, MacD, various moving averages and the Relative strength index. This is not an exhaustive list of the indictors you can use and most charting packages come with more indicators than you will ever use. There is no question that for the budding trader looking for a trading system, that a indicator based system is the better way to go. Trying to decipher the various fundamental issues affecting price can sometimes be a test of your mental patience. Most traders, both new and experienced, tend to focus their trading system on a technical level. They either develop their own or go with a trading system that has been developed by someone else.

As you gain experience, you may, like many veteran traders do, develop your own trading system. Usually it is a combination of the various systems that have tried over the years. It can also be a mixture of the various technical indicators that they researched and tested. It doesn’t matter which approach you use for your trading system as long as it suits you and makes you money. Once you have decided on the ways you will trade, many traders start to backtest their trading system. They are looking to ensure that the system they are using makes money. Backtesting is fine but you should keep in mind that the past does not equal the future. Backtesting does not put your trading system to the test in live markets. When you backtest, you have the luxury of looking at different scenarios and taking your time in deciding what you will do.

A more popular way to test your trading system is to forward test. This simply means that you trade your system live “in the market”. Using a demo account or real money, you put your trading system to the test in the real world. It also gives you the chance to see how the trading system suits you. There really is no excuse to not forward test. Almost every single forex broker will offer you a demo account. Many brokers also allow you to trade dimes in a micro account. There is one broker out there that I personally use that caters to new and veteran traders alike. For the new trader, they are able to trade in “units” which can be a lot lower than the micro account. So you have your trading system and you want to know if over the long term it can be successful. This is where we look at opportunity and expectancy. Think of expectancy as what you can expect to win or lose for every dollar you risk.

The formula is quite simple:

Expectancy = (Probability of winning × average win) – (Probability of losing × average loss).

You do not want your trading system to have a negative expectancy. You want it to be positive and obviously the higher the better. What is opportunity? Simply put, it means how many opportunities it will present so you can trade. When you multiply the expectancy of your swing trading system with the opportunity, you can see how much you can possibly make with your system over time.

So you have decided on your trading system and now comes the most important part. We know that psychology plays a huge part in your success. You can search this blog for articles on that topic. All that is meaningless without having sound money management principles. Most traders fail and one of the biggest reasons is due to their poor money skills. Risking too much too often is the path to the poorhouse. Not even the best trading system can fix that. Most people entering the trading world think trading is all about profit and that is where you should focus. Any trader that has survived the learning curve will tell you it is all about risk and preserving your capital. The general rule of thumb for traders is to risk between 1-3% with their trading system. This is rule of thumb only as traders differ in how conservative they want to be. Depending on the trade setup, I have upped my risk to between 8-12%. Generally though, I stick to 1-1.5%.

This article was a “food for thought” type of post. It touches on a few key things that people thinking of entering trading should understand. Obviously, much of this can be an entire course in itself. If I was to sum it up over a coffee for you, I’d simply say pick your system, test it and don’t bet the house on one trade. You’d run into issues like psychology quick enough if you trade for any length of time. That is one reason that new traders would be best to join up with a company that offers a solid trading strategy and covers all the other areas outside the system as well.

For more updates from Mark and the team at NetPicks, be sure to visit their trading tips blog at NetPicks.com.