How to create a profitable trading system?

There isn’t an iota of doubt that it takes a lot of time and experience to build a trading system that is not just capable of generating profits but consistent profits each and every time they are being put to use by the trader. Stock trading systems developed by traders with precision and knowledge about the market must comprise of strategies that have a certain edge which helps a trader earn profit in the long run without exposing him to a lot of risks and uncertainties. There are a number of ways through which a profitable trading system can be created, a few of which are enlisted below.

profitable trading system

Make sure your investment is realizable
The very first step of creating a profitable stock strategy begins with determining a fixed entry and exit price for the investment that one is willing to make. The pre-determination of realizable stock prices help to make sure that you’ll enjoy liquidity in the long run which is like a pre-condition for profitability.
• Apply back testing
As mentioned earlier, trading strategies need to possess a certain edge through which it can generate profits and this edge may be a particular stock or security that is capable of earning you huge profits. Make sure to examine each and every component of your system before actually proceeding with it. There is all likelihood that your system contains a particular stock that is capable of generating high profits but isn’t accessible in practical world, remove that component immediately in order to make your system more realistic and achievable.
• Check for system robustness
Before putting into actual use, every trader must check its trading system from all possible aspects. Change values of parameters, up-down the values and change dates of simulation in order to check the robustness of the system. It has often been observed that most of the stock trading systems have instruments that perform well within trends but tend to underperform in sideways whiplash period, double check the dates and trends of such instruments.
• Ratios are important
There are a number of characteristics that every profitable trading system must possess, the most important of which being positive and high Sharpe and sortino ratios. The positivity of these ratios indicates long-term liquidity and profitability of the trading system. Try and exclude systems that have high standard deviation and drawdown because these factors indicate higher amount of risk and uncertainty which might prove detrimental for the prospective profitability.
• Understand demand/supply rules
It is pertinent for every trader to understand the rules of demand and supply prevalent in the trading system and incorporate the same to develop a robust strategy. The on-going demand and supply variables determine price of a stock and an opportunity to make profit knocks at the door of a trader as soon as this system of demand and supply is out of balance. In order to make a system profitable, one must make sure that the person on the other side of the trade is making a mistake and you need to react proactively to take advantage of his mistakes. Back test your strategies and systems using various tools and you are bound to develop a system that is extremely profitable and rewarding.