Developing a System - Step 1

Chapter 4 of Trade Your Way... is about the steps necessary to develop a system. Tharp lists 12 steps in the process which are

1. Take an inventory


2. Develop an open mind and gather market information


3. Determine your objectives


4. Determine your time frame for trading


5. Determine the best historical moves in that time frame and notice what those moves have in common


6. What's the concept behind those moves and how can you objectively measure your concept?


7. Add your stops and transaction costs


8. Add your profit-taking exits and determine your expectancy


9. Look for huge reward trades


10. Optimize with position sizing


11. Determine how much you can improve your system


12. Worst-case scenario: mental planning

I find it odd that Tharp gives a list of steps to take before he fully explains some of the concepts involved in these steps, like position sizing and expectancy. What I'll most likely do is try to follow these step-by-step and jump to the pertinent chapters as needed.

First off, "take an inventory".

I went through a lot of this in a couple of previous entries where I conducted Tharp's interview with myself (that sounds a bit schizophrenic, doesn't it?). I think my computer and data management/manipulation skills are solid, so I know I won't have a problem in that area. My temperament is pretty even, although I do have moments where I lack composure. I believe that comes from an accumulation of negative feelings that I don't express. Then these feelings overflow and I express them inappropriately. This is something I've known about myself for a while, and something I really need to work on.

Other than that, I think my temperament is mostly good. I can work towards a goal for a long time and I tend to stick to plans that I make, so both of these indicate patience. I am a little concerned that I could get caught up in the excitement of having a trade on and think about it more than I really need to. Hopefully once I've traded long enough I won't focus too much on any open trade. Naturally I won't like taking losses, but if I can build a system in which I can have a positive expectation, I won't bail on it. That's a big emphasis of both Trade Your Way... and Way of the Turtle; when you do the work of creating a system yourself, you have much more confidence in trading it, which makes you less likely to quit on it.

Time could be an issue since I will only have about 2 good clean hours to devote to research and testing. I think I can make up for it by trading a system that's more long term in nature, although eventually I want to be able to trade more on a short term basis using automation. Of course that's a goal that will come later.

As for capital, I'm only willing to commit $100 right now. The good thing about OANDA is that I can trade very small amounts, so I can size my positions to any level of risk. I consider this to be an exploratory exercise, to see if I can become proficient enough to commit a higher level of capital someday. With this being such a small amount, I can afford to lose it all, which may very well happen.

I think that's a good first step today. Next time I'll work on Step 2.