Stock trading system

A trading system is a set of rules that tell you how to trade stocks or mutual funds. Every trading system has three parts:

1. A Market Timing Part: Something to tell you whether you should have long position, short position, or to be in cash.
2. A Selection Part: Something to tell you what to buy, when to sell, and when to buy something else.
3. Money Management Part: Something that protects you from the unrecoverable loss by telling how much cash to have, how much of each stock to have. We could call it Portfolio Management.

A trading system doesn't tell you exactly what stock to buy. It tells you whether a given stock should be bought or not. That implies that using a trading system requires ability to manipulate with a lot of informations about a lot of individual stocks. For example, there are about 3300 companies on NASDAQ stock exchange and about 2600 on New York Stock Exchange. There are a lot of trading systems offered on the Internet.

A very simplified example of a trading system could be:

1. Check if there is a growing trend in chemical sector for a week
2. Check if ABC company from chemical sector is following the trend of the sector
3. Check if it is safe to buy in order to maintain a balanced portfolio

If answer to the previous question is yes, then buy shares of the ABC company. Otherwise, check for some other company or sector.

A six must for the trading system:

1. The trading system must be "likely to be profitable."
2. The trading system must use as few rules as possible.
3. The trading system must have robust parameter values, usable over many different time periods and markets.
4. The trading system must permit trading multiple contracts, if possible.
5. The trading system must use risk control, money management, and portfolio design.
6. The trading system must be fully mechanical.