Lecture eight, your trading system. So how did you do on the test? As you can see from this example, it's not the system with the highest win rate that makes the most money. It's a combination of both the win rate and the risk reward ratio. And this is a term that I call expectancy. Let's compare these two systems.

And I'll just walk you through the calculations. So, system a has a 50% win probability with a win loss percentage of three to one. So if we risk $100 hundred euro, so he portrayed out of 10 trades, we should in theory have five winners and five losers. five winners would generate a profit of 1500 euro and five losers would generate a loss of 500 euros. Therefore, we would have a net profit of 1000. When we compare that to system B, which has a higher win probability of 70%, but a lower win loss percentage of one to one, as you can see here, if you risk the same amount, your 10 trades will actually result in seven winners more than system a and three losers, less than system a, but you will only yield 700 euro for your seven winners and you'd lose 300 euro for your three losers.

Therefore, your profit is only 400 euro compared to system a which has a much higher profit of 1000 And as I said, this is where you know most amateur traders go wrong because their belief is is the system is the important aspect here. But really, the most important aspect is your psychology, followed by your money management and then your trading system. So let's have a look at the attributes of a good trading system. To me, a good trading system must have these four attributes number one, it must have a positive expectancy and to put put this simply, it must make money. So, this is quite different to the term an edge, an edge is actually the chance of one thing happening over another. So your your edge in trading or gambling terms needs to be greater than 50% But in terms of expectancy, you could have a system with an edge of less than 50%.

So here's an example of a trader called Richard Dennis, who actually created a fund worth over $200 million. And he was responsible for the the turtles trader program back in 1984. And he had a trading system with a 5% Win win rate. But actually, when that system one, it one mega bucks. So, point number two is your system must be extensively tested, you must back test your system. And you must back test it for a number of years because back testing for weeks or even months, doesn't actually reflect or truly reflect the market were over a number of years, the trading conditions can change.

For example, if you took a system that you back tested in 2000 In an eight, when markets were crashing and prices were falling, that's quite different to, you know, a steady market state or even a growing market. So, if you had a system that were giving you results driven a declining market, you wouldn't get the same results when that market started to grow. The third factor is your system must be verifiable. And here, what I mean is, somebody else should be able to pick up your trading system, follow your rules, and get the exact same results as you do. So, essentially, what you need to do with your system is create a set of robotic rules that anybody can follow. And finally, of course, if you're trading something, it must be something that's repeatable, and not just a one off random event.

So here's an example of a trading system. And as you can see, this is not a system that I currently use. And I've deliberately, actually put access to eliminate a lot of details here. So it's not a system that you can take and trade. But as you can see, it's quite logical. And it's it's rule based.

And one thing that I've also do with my trading systems is try to remove any sort of subjectivity. So there's no oh, I wonder if that means this. So I wonder if that means that it's quite black and white. So as you can say, See here, the first rule is if xx is red, or if xx is green. And what the rules are saying is, if something happens, then something else, this one has quite a lot of conditions. So what it's saying is, if x x is red, and something else happens, and then something else happens, and then something else happens, and then something else happens.

Then you can take the trade. And also, if you look below the tables, you'll see that there's also rules on how to manage the trade. So when I put a trade on using this system, I had to trade management rules for half of my stake. And likewise, as you see, right at the very bottom, there's a money management rule, defining how much money I risk on each particular trade. Now, this is a good example of a trading system and something that, you know, you as a, as an aspiring professional trader need to follow. So the next question is, you know, do you buy a trading system?

And I'm sure you know, if you've had emails, offering systems with fantastic trading results, or do you develop your own? This is a great question. But my point here and my observation is that the trading system must suit your person. And it also must suit your lifestyle, or you'll be unable to follow it with the discipline that you need in order to be successful. For example, are you a more cautious person, and if you are a system, which has you wait for confirmation before entering a trade would be better suited to you. If on the other hand, you are more aggressive, then maybe you would feel more comfortable entering a trade where the price is actually moving against the direction of your entry.

You should also consider your own personal style. You know, are you a day trader a swing trade or position trader? Would you feel more comfortable trading a system that follows the trend? Or are you a counter trade trend counter Trend Trader because all of these different variations require a different mindset. I'm not suited to everyone. But one thing I'd like to be clear on is neither is wrong or right.

It's just simply a matter of personal taste. And believe me, if you try to trade a system that isn't right for you, then you won't stick to it. You'll interfere with it mid trade and therefore your you will affect the overall performance and ultimately you will fail. This is why Personally, I would rather create my own trading system instead of buying one off the shelf. In the next lecture, we will look at the formula for trading success and what this means for you as a professional trader.