How to Build a Successful Stock Trading System?

Stock Trading Course Overview

This course is designed to illustrate the tools and rules of short-term trading. Our goal in producing this course is to provide beginner and novice traders with insight and guidance to rule-based trading. It is our hope that this course will give students a better grasp of the essential tools and rules of short-term trading, so students can develop their own rule-based trading system.  

Stock trading course for beginners

Stock Trading is a Business

Stock trading, just like any start-up business, is vulnerable to the same elements that make any other business succeed or fail. As statistics tell us, most new businesses fail within a short period of time. If you take a close look and analyze failed businesses, you will see three common problems:

  1. The absence of a solid business plan
  2. Lack of capital
  3. Inefficient management

A business plan in day trading is what many refer to as a trading system. A good business plan will be comparable to a tried and tested trading system. A trading system, simply stated, is a set of rules and goals which a trader has developed over time, that are followed religiously. These rules and goals must complement the trader’s personality and trading style. Once a trader has developed the rules and guidelines, he then must be disciplined and always trade according to these rules and guidelines.

Throughout the course of doing business, a trader must develop both the skills and instincts needed to spot opportunities and profit from them. Once the set of rules and guidelines that make a trading system is defined and followed by a trader, he must still be open-minded, so he can fine tune his system to adapt to new market conditions.

A trading system can spot profit opportunities using technical analysis, tape reading, level II quotes, trading on news releases, anticipation of news, analysis of the world economy, and so on. A trader might employ strategies used by scalpers, momentum traders, trend traders, swing traders, and the like. A trader may also use the finest trading tools such as hardware, software, order execution, broker, etc.

The bottom line is that when you develop a trading system, it must cater to your personality and to the trading style you feel most comfortable with. I know of a successful trader who trades off support and resistance exclusively. Others take different approaches. What matters is that you tailor the trading system to suit you, rather than trying to mimic the approach of another trader with a different temperament.

Any business plan, or a trading system, should also include all the resources you are willing to commit in pursuit of the goals of your business. Since the goal of every business is simply to make as much money as possible, your business plan should answer the questions: “How am I going to make money in the stock market, consistently?” And more importantly, “How can I lose the least amount of money while I am learning this business?”

Capital for Stock Trading

Capital is an essential element for launching any business, and it is important to determine how much capital is needed upfront to give a business a good chance to succeed.

The essence of capital in stock trading is equal to the essence of oxygen to a living organism. In the absence of oxygen, a living organism will die. Without sufficient capital, a business will fail. A business that is not well capitalized has only a slim chance to turn a profit. Stock traders who are not well capitalized will normally take bigger risks, and if the rewards are not there in a short period of time, the high risk plays will bite the trader and have him sending out resumes in no time. The number one goal of a trader should be to protect his capital under all circumstances. This means that a trader should not take extreme risks attempting to hit a home run on every trade. A day trader who wishes to make his million in one day will be hung in one week. As the saying goes, “bulls make money, bears make money, and pigs get slaughtered.” Don’t be a pig!

What Does “Well Capitalized” Mean?

In stock trading, well capitalized means having enough capital to be able to trade without having to worry about paying the bills. In other words, one needs to have enough capital, which he can risk, and also be able to afford both the opportunity cost arising from the time he will need to commit to this business, and paying the bills, for a period of time of at least one year.

If you make it or fail at it, it is only worth a shot if you can sustain the loss of your risk capital and the time you have committed. Obviously, one has to be financially comfortable in order to be able to commit risk capital and also have the available time for this new business venture. If you do not have the luxury of doing so, then you will be playing against bigger odds. Why? Because you will end up being merely an emotional trader due to the added pressure of having to pay the bills at the end of the month.