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What is System Trading?

System Trading

If you want to survive in the market and play the game with big boys like HNI's, FII's, DII's, and other Hedge Fund houses then you have to follow the system.

The system will give you the edge to make big money and loss small money since the rules are already defined in it but you can alter it with your fear and greed emotions and that is called not following your system or rules.

Well, this is the difference between a professional trader who is very disciplined in terms of following rules and an emotional trader who always gets driven easily and makes huge losses.

Basically, you have to trade like a robot since business is done without emotions and by following only predefined rules and the same way you have to do in the trading and treat it like a business.

You have to understand the move of big players and you have to apply the hacks & tricks used by them hence you have to follow the systematic trading approach. Hence before creating an edge you have to create the system.

Example related rules:-

1. Scalp trading time (9:15 to 10:15) OR (1:00 to 3:00) So rules can be time-based. By doing this you can control your Greed and urge to do unnecessary trades.

2. This can be one of your rule:- If in a day you are taking 5 trades then at four continuous losses you should not take 5 trades. 

3. And another one can be on a time basis that after 12 I will not do trade OR I'll do trading in the first half or second half of the session.

If you have selected the stock then before that you should know your entry, exit & stop-loss points.

By following the system it will reduce the scope of thinking >>> You have already defined your rules that 1% stop-loss or after 5 points gains I'll get out of the trade.

If anyone comes in b/w and says that it will go much higher, you don't care about it since you stick to your rules.

System trading will reduce the scope of emotions >>> By setting rules you have to be completely calm just like a computer and execute it without having a second thought about it.

Always define your asset class before you have to build a system for Equity, Commodities, Currencies, and Crypto. Is it work for one type of class or for all(For that backtesting is needed).

Always have your SWOT (Strengths, Weaknesses, Opportunities, and Threats analysis) analysis like are you comfortable with Indexes/stocks. If it is index then Nifty / BankNifty as per your temperament level and risk appetite.  

RULES related to Position sizing, Risk, Entry, Exit, Stop-loss, Trailing stop-loss.

An Ideal System has Lower Win Rate BUT a Higher risk-reward ratio.

Don't breach system rules on loss streak (Wait and watch paralysis).

Avoid Random Trading.

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Template of System Trading:-

Mode:- Intraday

Instrument:- Option Buying

Signal Generation (Buy/Sell):- By some Indicator

Stock Selection:- As per some screeners

Trade Execution:- Entry-level by system

Exit Strategy:- Targets given by automatic indicators

Stop-Loss:-

 a)Long - Low of signal generation candle

 b)Short - High of signal generation candle

Risk Reward:- Will vary b/w 1:1 - 1:2

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