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3 Day Hammer Stocks
Creating a Trading
This article could
be entitled, “How to Steal a System for Fun and Profit.” I may be kidding a bit, but not much. There are several reasons to start
construction of your own trading system by stealing or borrowing
another trading system's ideas and concepts.
First, it is
easy. There are some pretty good trading systems out there. Some are
free and some are very expensive. The cost of these
systems is not an indication of the value of the system. The problem
with some trading systems is that they might not work for you. Now
I am not talking about out right dishonesty, which is a big problem
when trading. Rather, I am talking about your ability to effectively
trade with the system that you are using or buying.
You need to use a
system that matches your life style and personality. If you have a day
job (not trading), do not use a system that requires you to stare at a
screen all day. You will be distracted at work and miss the
opportunities to make money or worse you will not close a trade
effectively and will lose money.
Some systems have a
potential to lose 20, 30 or 40% of you money before they are
profitable. Can you handle a system that can drop your trading capital
to half before making money? Or, are you prepared to have a string of
8 to 10 loses in a row before you have a winning trade? Some of the
best traders in the world lose money on more than 50% of their trades.
An excellent trading method made famous by Richard Dennis and William
and sometimes referred to as Turtle Trading, is
one of the best
trading system that I know. They get returns in excess of 20 to 100%
per year. Would I ever trade their exact system? Not a chance! Dennis
and Eckhardt also get losses on over 60% of their trades. I am not emotionally
capable of handling that many losses, even if I can get large returns.
Their system is great, but I would not follow it and therefore,
I would get into trouble and lose money. However, I would and did use
some of their concepts in other trading systems that I developed. More
on that idea, latter.
reinvent the wheel. Let’s face it, if you are a new or even a fairly
serious trader, what is the possibility that you will come up with a
totally new concept? There are some very smart and wealthy traders out
there. Why not use their ideas? Remember Dennis and Eckhardt in the
above paragraph. Basically, their system is based on a “breakout”
method. I know that I can not trade with their method but I use
breakouts to validate or confirm my moving average cross-over system.
Third, use other
systems to give you the basics of what is necessary in a system to make
money. All great systems have three basics:
What price do you enter and exit the trade
Money Management - How many
shares do you place in a trade
Risk Control: You need to
preserve capital until a favorable price trends appears
Study and learn
from other systems and make sure that you incorporate all the above in
Last, use other
trading systems is to give you new ideas and concepts. Use other
trading systems’ ideas and add them to other or new systems. Use other
trading systems’ concepts and add them to your own method.
Be creative and
combine systems and methods. Add an ADX indicator to a trending
system. This might prevent whipsaws when the market goes flat. Perhaps
you use a 3 day breakout as a close to an oscillator system to
indicate that the stock is no longer trending.
No matter how you
construct your system, remember that the key to success and profit is
sound money management and risk control. It is not having the fanciest
system or the latest indicator that will make you money. It is how you
use cash management, risk control and trading discipline that will
make the difference between success and failure.
Keep in mind that
not all trades can be successful. A losing trade does not mean the
system is a failure. In fact, several losing trades do not mean that
you have a poor system. Read about
expectancy. Although you want to be
right on every trade, profits come from having a system with a positive
expectancy. Loses are just the cost of doing business.