How Do I Choose the Right Trading System?

Choose whatever trading system you want. I’m serious. If you like to trade with the trend, do that!

This question comes from Mike in the 646 area code. Thanks, Mike!

Here is my 1-step method for choosing a trading system:

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1) Choose whatever system you want.

Okay, that’s it.

You’re done.

Wait. What?

I’m serious. Choose a trading system you like. If you like to trade with the trend, do that. If you like to trade like the turtles and do moving average trend trading and hold trades for a long ass time, do that. If you like counter-trend trading, do it.

Don’t listen to people who say your system is dumb. Don’t worry if a famous guru or mentor “approves” of your trading system. Do what you like. Choose what you want to choose. If you choose what you like, these amazing things happen:

1) You will obey the rules of the system. Why? Because you like the rules. Why do people break trading rules? Because they like something else MORE than their current trading rules.

So the answer is simple: do the thing you like, and you will stop breaking your rules.

2) You will enjoy your trading.

3) You will become the only person responsible for your success. When we choose a trading system that we think we are “supposed” to choose, guess what happens when things go wrong? We blame the system. Or we blame the creator of the system. This is called “Risk Transference,” otherwise known as “blame shifting,” or “being a whiny bitch.” My friend Shonn Campbell invented that phrase.

4) You will share what you are doing with others. Sharing is great – you learn more about your trading system when you teach it. You learn to think more clearly. You learn new rules.

5) You will stick to the system for a longer time. Focus is good. Most traders are fickle lovers of systems. They take a loss. They get upset. They switch systems. They then get upset again. They don’t make money. They make changes.

That’s just the short list of the wonderful things that happen when you choose a system you like.

*But Rob, what if the trading system I like does not make money?*

You smart ass.

Okay, I’ll answer your question.

Here are three things you can do if the trading system you like does not make any money:

1) Cut your losses off more quickly. Most traders are drunken monkeys who hide from losses. They think that if they hide from the loss it will magically turn into a winner. Instead, face the loss head on and cut it off.

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2) Or, instead of cutting your loss quickly, reduce the size of your trade. Then keep the trade open as it goes against you. If you use a very small trade size, you become the master of your fate. You get time to work out of a loss. You can add another trade later at a better price. This is cost averaging. There are a thousand jackass fake gurus who will tell you that this is a terrible idea.

I suppose all of these people get divorced as soon as their spouse forgets to take out the trash. I suppose all of these dummies end their friendships as soon as the other person cancels plans one time. I suppose all these idiots give up on everything the moment just one small thing goes wrong.

I encourage you to not be a total whimp. Invest a very small amount into your first trade. So small, in fact, that if it moves against you, it doesn’t matter.

Then you can add to it if it goes in your favor. You can add to it if it goes against you. You can work the position. This is glorious.

I love this approach because no one knows if the first trade is going to be a win. By starting small, you can see what the market thinks about your trade idea. And then act accordingly.

SIDE NOTE: This approach depresses traders who want to make a million dollars in five minutes, or who want to make a lot of money very fast. I am going to tell you something: You can trade small and make a lot of money over time, or you can trade like a coked-out cowboy and lose everything in your attempt to amass riches and glory as if you were starring in the next installment of Wall Street. Your choice. Don’t say I didn’t warn you.

3) You can hold your winning trades open longer. This is called “letting your winners run.” Most traders panic when a trade goes profitable. It is as if the high school cheerleading captain has just spoken to them near the lockers. They freak out. They don’t know what to do. They are unfamiliar with success.

So they panic and close the winning trade.

SIDE NOTE: In 1989, Katherine MacDonald asked me out before the start of our A.P. Government class. I acted like I didn’t hear what she said. Why? Because I did not know how to go on a date.

When you have a winning trade, perhaps try the following:

i) Move the stop-loss to break-even so that it cannot become a losing trade,

ii) Let it go a bit further.

And practice letting your good trades go just a little bit farther. Don’t try to go for the huge win on every trade. But maybe just try for a few extra dollars, points, or ticks, on your next trade.

These suggestions should help you improve an unprofitable trading strategy.

*Rob, I am worried about picking the wrong strategy and then losing a lot of money.*

Remember: This is not a life and death decision. If you make the “wrong choice,” no one is gonna die. And if you make the “right” decision, you are not going to wake up in a soft bed of a bajillion dollar bills.

And you control how much a trading strategy loses. Reduce your trade size, and you will not lose a lot of money if you make the “wrong” decision.

Everyone puts too much emphasis on the choice of a trading system. Traders get into dumb arguments about systems.

I implore you to pick something you like, focus on it, improve it, and then just let it run. Use it to make you some money before you change anything about it.

So, your first job is to chill out. Relax. There are a zillion great trading systems. I would love to hear from you when you find one that you like.

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