Designing A Trading System In Metastock – Part 1

In this three article series, I`m going to guide you through the
process I use to design a trading system using MetaStock I’ll
cover the four major components that every successful trading
system has in common, and then I’ll show you how to code these
components into the MetaStock program Please note that this is
by no means investment advice and any information I cover is
purely for illustrative purposes
I am a technical analyst by trade It is my belief that all
fundamental and economic influences on a stock price are taken
into consideration by the market Therefore, I focus my
attention on price action All my trading systems are based on
this understanding of the market, and the rules of my systems
are built to respond to price actions In this article, I’ll
cover the basic rules of trading:
- Entry rules (when you get into a position) – Exit rules (when
you get out of one) – Money Management rules (how much do you
put in a trade?) – Back – Testing (does the system work
historically?)
These four components make up a proven formula for designing
profitable trading systems in MetaStock Let’s start with the
first part
A stock passing through a precise set of conditions creates
entry signals before you will enter a trade on that security I
believe the rules set to signal an entry into a position should
leave no room for individual judgment I follow the KISS
principal – that is they should Keep It Simple Simon
Remember, there is no Holy Grail of entry systems There is no
MetaStock formula that will get you in at exactly the right
time, everytime With this in mind, it’s your goal to construct
a simple, yet robust entry system
Even though I always say that the entry is the least important
component of any trading system, you still must have some way to
enter a trade Here are the points that I think are important to
consider when identifying possible entry points
PRICE: It is important to set price maximums/minimums because a
stock’s price can determine its attributes For example,
speculative stocks tend to be cheaper, and blue chip shares tend
to be more expensive
LIDUIDITY: This is a measure of how much money the stock trades
at You need to set minimum levels of liquidity to keep you out
of stocks that simply don’t trade enough You can risk being
trapped in stocks where the market is moving against you if they
have a low liquidity
VOLATILITY: This measurement tells you how much a stock moves
It is important to trade stocks that move enough for you to make
a profit, yet aren’t so erratic that you can’t sleep at night
TREND: This is the cornerstone of technical analysis Remember
that “the trend is your friend” and that you always want to
trade with it, not against it You will need a way to measure
trend in your system
TRIGGER: This is the point that will indicate it is time to
enter a trade The trigger condition occurs only at one point in
time and doesn’t hold “true” over extended periods of time, such
as with a moving average cross over
When combined, these components are going to make up your entry
rules But, before we even begin coding this into MetaStock, you
need to determine one of the most critical elements of any
system What time frame are you going to trade?
+ Short-term, such as a reversal trader
or
+ Long-term, such as a trend follower
There are distinct differences between these two types of
systems and your choice here will have a marked effect on every
other decision you make about your system
Short-term systems tend to require a greater time commitment,
and more money However, the benefit of trading more often is
that usually your profits are more consistent, and are realised
more frequently
Conversely, longer-term systems tend to require less time, and
less money However, since you are keeping your positions open
longer, you need to wait until positions are closed out before
you can collect any profits
Generally, I steer my clients, particularly those who are just
starting out, to a longer-term trend following system It takes
less time, less money, there is less risk and it is easier to do
than short-term trading In addition, trend following systems
tend to have a higher win to loss ratios and are psychologically
easier to follow because of this
For the sake of this example, let us construct a trend following
system In the next two articles, I’ll explain how to code the
four entry components of a trend following system into
MetaStock
David Jenyns, leading expert in designing profitable trading
systems, MetaStock website offers a huge free collection of
trading related tips and tricks http://wwwmeta-form
ulacom/subscribe

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