Trading System: Everything You Need to Know to Create One
TABLE OF CONTENTS
Are you fascinated by the world of systematic trading and want to learn how to build an effective trading system? Great—you’re in the right place, because that’s exactly what we’ll cover in this article!
Why is it important to know how to build a trading system? The answer is simple: with a portfolio of effective systems, you can reduce risk, optimize profits, and face the market with a well-structured plan. In this article, we’ll explain what systematic trading is, how to build a trading system step by step, and why diversification is essential.
What Is Systematic Trading and How Does It Work?
Systematic (or algorithmic) trading is a method based on precise rules for entering and exiting the market. Unlike discretionary trading, which relies on intuition and personal experience, systematic trading follows tested, repeatable strategies.
Here’s how it works:
Defining clear rules: The trader sets strict rules for executing trades, leaving no room for interpretation.
Testing and optimization: Strategies are tested on historical data (backtesting) to evaluate their effectiveness before going live.
Automation: Dedicated software executes trades automatically.
This approach removes emotion, improves discipline, and allows for more structured risk management. If you’re a beginner, systematic trading could be your best solution for reducing the risk of errors and approaching the markets like a pro.
How to Build a Systematic Trading Strategy
Want to turn your trading ambitions into real results? The first step is to apply a step-by-step method to create your own trading systems. Let’s go through the key steps together.
1. Choose the Right Market
The first step in developing a strategy is choosing the right market. Every market has its own characteristics in terms of volatility, liquidity, and trading hours.
Some major markets to consider include:
Forex: 24/7 currency market with high liquidity
Stocks: Trading shares of publicly listed companies
Cryptocurrencies: Highly volatile digital assets
Commodities: Gold, crude oil, silver, and other physical assets
Bonds and ETFs: Typically lower-risk instruments
Which market is best? Unfortunately, there’s no one-size-fits-all answer. It depends on your trading style, goals, experience, and several other factors you should consider before diving in.
2. Choose the Right Approach for You
One of the strengths of systematic trading is its flexibility—there are multiple approaches that can be adapted to different instruments and market conditions. The most common include:
Trend Following: Buy when the market is rising, sell when it’s falling
Mean Reversion: Trade when prices diverge from the historical average, anticipating a return to the mean
Breakout Trading: Enter trades when prices break through key support or resistance levels
Bias and Seasonality: Capitalize on recurring price movements across different timeframes (daily, weekly, monthly, seasonal)
3. Test with Historical Data
Once you’ve defined the market and your approach, it’s crucial to test everything on real past prices to see if it works. This process, known as backtesting, lets you analyze how your trading system would have performed under different market conditions.
To perform effective backtests:
Use reliable historical data that covers different market phases
Account for transaction costs and slippage
Analyze key metrics like average trade, maximum drawdown, and risk/reward ratio
Why backtest? Because it lets you identify strengths and weaknesses in your system before risking real money—just like a pro.
4. Evaluate the Test Results
After backtesting, evaluate the results to determine if your strategy is robust and reliable.
Key elements to assess:
Consistency: Was the strategy profitable over time?
Reliability: Are the results repeatable or just random?
Risk Management: Is the maximum drawdown acceptable?
Expected Return: Is the profit/loss ratio favorable?
Sustainability: Is the average profit per trade enough to cover costs?
If results are inconsistent or too risky, it may be time to rethink the strategy. Carefully analyze every element before going live to minimize risk.
5. Optimize and Activate Your Trading Strategy
After testing comes optimization—refining the strategy to make it stronger and more resilient. This might involve:
Adjusting trading hours
Tweaking position management rules (stop loss, take profit, etc.)
Improving entry conditions
Applying volatility filters
And more.
Once optimized, test the strategy on a real account with limited capital to validate its performance before scaling up.
Diversifying Your Trading Portfolio: How Important Is It?
Diversification is a key principle in trading to reduce risk and improve return stability. Relying on a single strategy or market increases exposure to risk.
Here’s how to diversify effectively:
Across asset classes: Trade forex, stocks, commodities, and crypto to reduce market-specific risk
Across strategies: Combine trend following, mean reversion, breakout, and seasonal strategies for balance
Across timeframes: Use short-, medium-, and long-term strategies
Diversifying your portfolio helps limit losses and stabilize profits over time. This is especially important if you’re a beginner looking to build a solid foundation.
