10 Key Steps to Build a Profitable Stock Trading System

After you have attained a solid foundational knowledge in stock market investing, you will be ready to start to create your stock market Trading System.

Of course, any good educational service in the equities/security space should help you create this system yourself.

Developing a stock trading system combines logic, knowledge, experience, art, and science.

Your system will need to perform well, higher than 6% on average per year historically, and be expected to perform well in the future, at least for the time frame in which you plan to use it.

The nirvana of a trading system is that it would need to perform well and need little “user interpretation” for it to function. This would mean using “trading robots” or a mechanical method.

I do not recommend a trading robot that would place your trades for you, as this will essentially take any on-the-fly decision-making out of your hands.

However, you should use a mechanical method (computer) to help you test your systems and create the buy and sell signals for you.

See some excellent backtesting software options here.

1. Understand The Elements of an Investing System:

A good investing process will have the following important elements.

• A sound stock trading system will need to be backtested to prove that it worked in the past. This would give us an element of proof that the logic upon which we base our assumptions are functional.
• A good system allows us to trade with less emotion providing a market advantage. Emotion is known to be the culprit of many trading errors and losses.
• Automation of the fundamental screening for the stocks will save us time.
• Automation of the technical indicators scan will also narrow the list to focus on our preferred candidates.

2. Build a Foundation of Knowledge

Take a high-quality stock market training course. This site has a FREE 10 module Stock Market Training Course, covering fundamental and technical analysis. For help choosing a quality stock market education, read this Stock Market Training Review.

3. Decide if You Trade Short-Term or Invest Long-term

If you have the time to immerse yourself in the Stock Market fully, you might want to trade shorter timeframes (days to weeks), for example. Day trading comes, of course, with its own set of higher risks. If you have a full-time job and less free time available, you may want to trade longer timeframes and only monitor your stocks weekly.

There is, of course, no solid proof that day trading with its higher risk actually yields better results than long-term investing.

4. Choose Your Stock Markets & Timezone

As an active trader, you should choose your Stock Markets wisely. If you want to be active (checking your stocks intra-day or daily), it may be wise to trade a stock market that is not in your time zone.

For example, Mr. Smith has a busy day job and only has time free in the evening. Mr. Smith is based in India. Typically he would want to trade the Indian Stock Market. But actually, the European Markets might be a good choice as they open close to the end of his working day. Therefore, he can focus his spare time on the stock market in question.

If you are a less longer-term investor, then it might be wise to trade the stock market in your time-zone as you may have the advantage of being able to spot successful companies in your country and investigate them further using your “Local Knowledge.”

5. Understand Your Profit Target

What is your target? Active traders should expect higher profits as they spend more time trading the market.

Less active traders might expect a slightly lower return as the trade-off for not being as focused. But what is a good target?

Do not believe the scam artists of “Penny Stocks Newsletters” and peddlers of “Microcap Stocks”; in the real world, 100% or 1000% profits are not realistic; in fact, it is irresponsible that they would promote their services in this way.

Warren Buffett has averaged just over 24% annual return over his entire career. That is only 2% per month. Realistically it would be best if you chose this as a viable upper target.

6. Select Your Investing Screening Strategy

Filtering stocks based on their financial performance may be an integral part of your strategy, here are highly relevant articles to help you get started.

Related Articles: Finding Great Stocks With Stock Rover

• 12 Legendary Strategies to Beat the Market That [Really] Work
• Our Beat the Market Screener [Actually] Beats the Market
• 4 Easy Steps to Build The Best Buffett Stock Screener
• 6 Steps to Build an Ethical ESG Investment Portfolio
• All Value Investing Strategies & Articles
• Use a CANSLIM Stock Screener Strategy To Beat the Market

If these terms are vague notions to you, please go back to step 1.

 

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7. Learn To Analyze Stocks

Technical analysis is critical for short-term trading and essential to understanding long-term value investing. Knowing where the company’s stock is relative to its history can be very illuminating.

There are two essential methods to analyze a stock. Long-term investors use fundamental analysis of a company’s financial statements, such as earnings, sales, dividends, and future cash flow valuations. Stock Traders use the technical analysis of stock charts, prices, patterns, and supply and demand using volume indicators.

What Chart should you use?

• Bars
• Candlesticks
• Point and Figure Charting
• Ichimoku Cloud Charts
• Market Profile

What indicators should you use?

• Price Indicators – the study of price based chart indicators or Oscillators known as Stochastics,” Relative Strength” (RSI), “Rate of Change” (ROC), “Moving Averages” (MA), “Moving Average Convergence Divergence” (MACD), Parabolic SAR, ADX Average Direction Movement Index.
• Study of Volume – understanding how the volume level has a relationship with the price – and how the price has a relationship with volume.
• Study of Price Volume Indicators – “On Balance Volume” (OBV), Chaikin Money Flow, “Time Segmented Volume” (TSV), MoneyStream.

Important Article: Fundamental vs. Technical Analysis: How To Analyze Stocks

8. Turn Your Choices Into Specific Rules

Quantify your choices of the fundamental screens and technical analysis screens.

At what point would you buy?

• When the 10-day Moving Average crosses the 20-day moving average and hold above the price for two days?
• When RSI holds above the RSI 5 days Moving Average for two days?

At what point do you sell?

• When MACD turns negative?
• When did you see a negative divergence in Money Flow?

9. Backtesting Your Rules

Using backtesting software, you can implement your rules and see if they work historically. This is a fascinating and immersing topic. Most Stock Market Analysis Software allows you to backtest your theories to see if they work historically, and some even allow you to do forecasting forward.

There are a few vendors that provide backtesting software. But our award-winning vendor is an excellent choice for forecasting forward, and backtesting is MetaStock.

The great thing about backtesting is that you get to prove if indicators are meaningful. Just because someone tells you how to use MACD, does that mean it works in the real world? You can find out with backtesting.

MetaStock Review 2023: Charting, Backtesting & Xenith Tested

If the systems produce the targets you expect, move to step 10.

10. Let Your Rules Run & Start Investing.

Let your rules run for a few weeks or months to see if they continue to perform; tweak them as necessary. If you are confident in the results, move to the final phase.

If successful – Implement the system – If unsuccessful – tweak the system and start again from step 5.

If your rules are working, implement your system start to trade it. If not, you may need to refine the system. The best methods have been refined repeatedly to remove logical errors and improve the percentage of winning trades and the % of the profit per trade.

Summary: A Great Stock Trading System

Building and running a trading system takes time, a logical mind, and patience. Many successful traders have started to make losses because they have deviated from their winning system or strategy through boredom. Try not to make the same mistake.

The results will be profits and plenty of them.

Now you know the core elements of a sound investing system, look at the 9 Step Stock Market Investing Strategy with free books and videos.

Checklist: Stock Investing System Rules

Stock Investing System Rules Checklist	Long-term Investing Rules
Step 1. Build a Foundation of Knowledge	Free Training Pro Training
Step 2. Decide if You Trade Short-Term or Invest Long-term	Long-term Investing
Step 3. Choose Your Stock Markets & Timezone	USA, Europe, Asia
Step 4. Understand What Is Your Profit Target	> 10% per Year
Step 5. Select Your Favorite Fundamental Screens & Strategy	CAN SLIM Value Investing Dividend Investing Growth Investing ETF Investing
Step 6. Select Your Software, Charts & Indicators	Stock Rover, Best Screening Strategies & Research
Step 7. Turn Your Choices Into Specific Rules	Buy on Stock Pullback Buy After Good Earnings Report Buy at Start of Year (Tax Harvesting)
Step 8. Backtesting Your Rules	Stock Rover BackTesting Article
Step 9. Let Your Rules Run.	Stay in the Market Long-Term 10 Year Period Sell Only if Market Dominance / Competitive Advantage is Diminished
Step 10. Start Investing/Trading	Choose a Broker Recommended USA – Firstrade $0 Commissions Best International Broker – IB

Checklist: Stock Trading System Rules

Stock Trading System Rules Checklist	Short-term Investing Rules
Step 1. Build a Foundation of Knowledge	Free Training Pro Training
Step 2. Decide if You Trade Short-Term or Invest Long-term	Short-term Investing Swing Trading – Weekly Day Trading – Daily
Step 3. Choose Your Stock Markets & Timezone	USA, Europe, Asia
Step 4. Understand What Is Your Profit Target	> 1% per Day?
Step 5. Select Your Favorite Strategy	Trading The News Trading Leveraged ETFs
Step 6. Select Your Charts & Indicators	MetaStock for Backtesting TradingView for Trading & Social TC2000 for USA Trading from Charts
Step 7. Turn Your Choices Into Specific Rules	Break of 50 MA RSI Breakout MACD Cross Over Chart Patterns Candlestick Patterns
Step 8. Backtesting Your Rules	Technical Rules Proven
Step 9. Let Your Rules Run.	Timeframe for Testing 5 Minute Chart Backtested 1 Year
Step 10. Start Investing/Trading	Choose a Broker Recommended USA – Firstrade $0 Commissions Best International Broker – IB