This is How Professional Traders Actually Trade

All right, we've talked a lot about systems and rules and backtesting. If someone is new to trading or new to systematic trading, I probably need to take a bit of a step back and give an example of a system or a trading strategy that you can backtest that has a profitable, a positive edge. So I just want to give a real simple example. Think of trend following. Trend following means you follow the trend, right? If a stock is going up, you buy it, hold it while it keeps going up, and when it eventually starts going down, you sell it and you try and make money out of the middle. So a really simple trading strategy that generally works in a lot of stock markets is a trend following system where you enter on a breakout. So you buy if, say, today's close is the highest close in the last 200 days. You buy and then you hold that and you keep holding it no matter what it's doing until it falls 25% from its high or 20% from its high. So you enter on a breakout and you exit on a trailing stop. The price goes up and the trail, the stop loss trails up and up. And then when the price turns around and falls 20 or 25%, you get out. That structure is an objective system that you can backtest. Now, you might need to add a few extra rules, like a liquidity filter, like a volatility filter, like an initial stop loss. But in essence, that's a system that will give you a positive edge because stocks trend. And if you allow yourself to get in a stock that's trending and hold it while it continues to trend, you'll get big winners. And if you've got an initial stop loss that gets you out before you lose too much money on a losing trade, you'll have small losers, big winners. Small losers makes money. Makes sense. So that's an example of a positive expectancy system. Now you have to backtest it yourself. Different markets behave differently and you might need some extra rules. But as I said, that's the general structure.