Your First Trading System: Rules Over Emotions

The difference between gambling and trading is a system. Let's build your first one.

What is a Trading System?

A trading system is simply a set of rules that define:

  1. When to enter a trade
  2. When to exit a trade
  3. How much to risk on each trade

That's it. Everything else is detail.

A Simple Example

Here's a complete trading system in three rules:

ENTRY: Buy when 20-day MA crosses above 50-day MA
EXIT: Sell when 20-day MA crosses below 50-day MA
RISK: Risk 2% of capital per trade

Is this a good system? Maybe, maybe not. But it's a system. You can backtest it, run it, measure it.

Why Systems Matter

Without a system, you're trading on:

  • Gut feelings
  • CNBC headlines
  • Twitter hype
  • Fear and greed

With a system, you trade on:

  • Predefined rules
  • Historical evidence
  • Risk management
  • Discipline

Guess which approach works better over 100 trades?

Components of Every System

Every trading system needs these elements:

1. Universe

What are you trading?

  • Stocks? Which ones?
  • Futures? Which contracts?
  • Crypto? Which pairs?

Be specific. "I trade tech stocks" isn't enough. "I trade the Nasdaq-100 constituents" is better.

2. Timeframe

How long do you hold positions?

  • Intraday (seconds to hours)
  • Swing (days to weeks)
  • Position (weeks to months)

Your timeframe determines everything from data needs to execution strategy.

3. Entry Rules

What triggers a buy?

Must be:

  • Objective — No interpretation needed
  • Measurable — Can be coded
  • Specific — "Price is too low" isn't a rule

Good entry rule: "Enter long when RSI < 30 and price > 200-day MA"

4. Exit Rules

When do you get out?

Two types:

  • Profit targets — Where you take money off the table
  • Stop losses — Where you cut losses

Both are mandatory.

5. Position Sizing

How much to risk?

Common approaches:

  • Fixed percent — Risk 1-2% per trade
  • Fixed dollar — Risk $500 per trade
  • Volatility-based — Risk based on ATR

Never risk everything on one trade. Ever.

Building Your First System

Let's build a simple momentum system together:

Universe: S&P 500 stocks Timeframe: 1-2 week holds
Entry: Stock makes new 20-day high + volume > average Exit: Stock breaks below 10-day low OR 10% gain Position Size: Risk 1.5% per position, max 5 positions

That's a complete, tradable system.

The Hard Truth

Your first system will probably not make money.

That's okay. The point is to:

  1. Build the discipline of systematic trading
  2. Learn what works and what doesn't
  3. Get comfortable with backtesting and analysis

Your tenth system might work. Your twentieth might be excellent.

Common Mistakes

Avoid these when building your first system:

❌ Over-optimization — Fitting perfectly to past data
❌ Too many rules — Complexity ≠ better
❌ No stop losses — Hope is not a strategy
❌ No testing — Don't trade untested ideas

✅ Keep it simple
✅ Test it thoroughly
✅ Risk small amounts
✅ Measure everything

Next Steps

Now you understand what a trading system is. The next module will dive into building more sophisticated strategies with proper entry, exit, and sizing logic.

But remember: a simple system you follow beats a complex system you don't.

Key Takeaway: Start with simple, clear rules. Test them. Follow them. Improve them. Repeat.