Any trader who does not only follow his guts, should have a set of rules that she or he follows. This set of rules is a trading system. Just saying this to make clear that I am not talking about automated strategies. The set of rules typically include
Entry rules
- condition(s) for setup
- filter rules (trend filter, volatility filter, time filter, intramarket filter)
- trigger condition
Exit rules
- stop loss and stop loss adjustment
- targets
- time based exit
Money management rules
- how many contracts to trade
- max. drawdown allowed per day and week
- drawdown that invalidates the setup
Quite often only one entry rule is discussed and called a setup and treated like a trading strategy. In my opinion this is not enough. Money management rules are most important, exits come second and entries third. Money management rules prevent the trader from blowing her or his account. Exit rules can be tested independently from entry rules. Entry rules should at least (!) have three components: a setup bar, filters to increase the probability of an edge and a trigger bar.
