Identifying a successful system is one of the greatest rewards a trader will experience. There are an unlimited number of ways that systems can be designed; your exploration should in no way be limited to the ideas suggested here. Although a logical approach is probably the best method to approach system development, you might discover a profitable trading system simply through random experimentation. (We happened upon a very attractive system quite by chance while performing a demonstration. The quick assortment of indicators we selected to illustrate a point turned up a historically profitable system, which has since proven itself in actual trading.)
If you’re already a trader, start with what you know. Begin testing systems that you currently trade, and see if the results historically match your expectations. If not, try modifying the system to see if you can improve its profitability. One way to do this is to look at individual trades that were unsuccessful, and determine if such trades could have been avoided by modifying the parameters of an indicator or by adding another indicator to the system. Make only slight changes, and retest often. Investigator is optimized to search for systems quickly, so you shouldn’t have to wait long for results.
HINT: Keep in mind that when you use bar patterns, you cannot change the entry dates when you are reviewing your trades. A bar pattern is a very specific entry condition. Some may find this too restricting; however, most of the successful trades we’ve found incorporate bar patterns. If you wish to eliminate unsuccessful trades from a system that uses a bar pattern as an entry condition, try adding indicators to the chart when you are reviewing the historical trades, and look for a condition that will eliminate the bad trade. You should rarely if ever use bar patterns as exit conditions. We’ve found that matching the exacting criteria of an exit bar pattern frequently results in very long trades.
If you are a beginning trader, we strongly recommend using bar patterns as entry conditions and using the Gann Trend Indicator, Revised Gann Trend Indicator, or Trailing Stop Loss as exit conditions. These indicators will give you a feel for system creation and historical testing. Be sure to look through all of the trades that Investigator discovered. It is a good idea to change the number of trades that Investigator logs during testing to a higher number than the default of 20. This parameter -- found in the Test Parameters dialog box during a historical test setup – determines the number of trades you can review following a test.
Consider beginning construction of a system by looking through Investigator’s charts for long upward or downward price movements. Look at the beginning third of such movements for short term behavior or price patterns that may serve as good entry criteria. Create a bar pattern to define this criteria, then test it historically and refine it. Instead of trying to define systems to capture the entire price movement, concentrate on capturing the middle 60% of the activity.
Good system ideas often come from fellow traders. There are many technical analysis organizations in cities that offer guest speakers regularly. Books, magazines, and even courses on technical analysis will contribute to the ideas that you incorporate in your trading systems.
Finally, be aware that successful patterns are rare. Investigator was designed to simplify the process of locating such patterns, but in the end diligence and effort will determine how large a system library you build.