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Trading Systems 101

By Joe Inman

I am amazed at the number of people who continually try to devise an electronic method of trading so they do not have to think. Professionals will usually do well with them, so why don’t these proprietary indicators and trading systems usually work for the novice trader? The biggest problem I find is that they are so wrapped up in finding ways for someone to think for them that they never take the time to learn to trade properly. They want the computer to do the trading for them.

Don’t misunderstand me; I am not saying that trading systems and proprietary indicators serve no purpose. On the contrary, I think there are some very good ones out there.

I have a good friend who is a knowledgeable trader; he is consumed by these types of bells and whistles. After constant urging from him, I took a couple of days to evaluate chat rooms and systems. I have avoided them since 2001, and now I remember why! One chat room gives trading signals with their own proprietary indicators. Another has a chat room that shows the trades, but you have to buy or lease their expensive system, and indicators, all in an effort not to think. In either case, you have to pay for the chat room.

I try to help my students understand that the most important thing they will ever learn in trading is support and resistance. If they understand that, and more importantly, how it works, they can trade. I’m not attempting to over-simplify things, but it is that simple: you either understand over-bought and over-sold, or you do not. When these special indicators and trading systems think for you, you still have to monitor your own charts and indicators so that you can compare the two. The two days I spent in chat rooms this week were a waste because the monitors did not understand this basic principal of trading.

First, let’s discuss “Ralph’s” trading room. Ralph has a proprietary indicator that he manifests to be “the bomb.” Ralph’s new indicator rules! I concede that the indicator seemed to work well, but as I said, one must still monitor his or her own time frames in order to have knowledge of over-bought and over-sold positions.

Ralph was using a 3,000-volume chart and a 133-tick chart. That is fine if you want to use these charts for a trigger, but please pay attention to the time frame into which you are entering with this trigger. I watched this gentleman make trade after trade in the wrong direction. He was shorting over-sold positions and going long on over-bought positions! If he had ignored these triggers and used the ones to go long at over-sold positions and short at over-bought positions, he would have been fine. I guess it doesn’t really matter whether or not your trades are profitable if you have enough people in your chat room at $200 per month!

The other chat room had an exclusive system for sale, and was a bit pricier at $300 per month. This guy writes software, so he is not cheap. Let’s call him “Frank.” I would have liked the opportunity to evaluate Frank’s trading system, but for $5,000, I would have been slightly disappointed if it did not work as promised. Borrowing the system from someone who had purchased it previously was not an option, since the terms of use prohibits the moving of the system from one computer to another, and is enforced by a security feature on the system..

Frank’s trading system is impressive, and it gives some good entries. The first two trades trading the ES or S&P 500 eminis were good. They picked up a full point on both trades, so I decided to follow them on the next trade when it set up. It set up and went short. As I watched this, I knew we were at the low of the day and were extremely oversold, so I did not take the trade. Surely enough, they got stopped out and lost two points, exactly what they had made on the previous two trades.

The rest of the day, I just sat and watched. At about 10:30 a.m., the trade started basing sideways, and that continued for the remainder of the day. I was amazed at the chat room monitor; he started doing the same thing Ralph had done! When we would get to the top of the range, he would go long, and when we would get to the bottom of the range, he would go short. Anyone, who has taken any basic stock courses, knows that these trades cannot work if you do not break those support and resistance levels. For heaven’s sake, this is something we learn in stock elementary school! Again, if you have enough people in your chat room at $300 per person, I guess it just doesn’t matter.

Remember, if you ever decide to pay for a chat room that promises to do the work for you, make sure the people using the indicators and/or the trading system are experienced traders who understand this basic law of trading. If you understand support and resistance, you can trade successfully.

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