3 Steps to Declutter your Trading System

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When was the last time you clean your Trading System? When was the last time you removed any “Unused” tools on any of your charts? Frankly speaking, many of you probably Don’t Even Realise that these “Unused” items have became an obstruction rather than a tool.

Like everything else in life, Trading requires some form of Decluttering in order to excel and advance. In fact, you should be doing this every now and then as you continue to develop your “Perfect” Trading System.

Today, I’ll show you my routine and I hope to influence you into it. With that, let me introduce to you my 3 Steps approach to Decluttering

IPS: Itemise-Priorities-Simplify

Step 1: Itemise

In this article, I’ll talk about Indicators. Alternatively, pick your own Trading subject and follow my steps.

To begin with, make sure to have a visual representation of your chart. Take a print screen or do this exercise over the weekend. The last thing we need is the distraction from price movements.

When you look at your chart and if it takes you 2 seconds or more to figure out what the Price is showing, then that’s a good indication that your chart is overly cluttered. The best chart should scream at you what the market conditions are within 1 second.

Below is an example of a cluttered and messy chart.

(Click on Image for Larger View)

So, you start off by itemising the indicators that you use. Example includes:

  • 20/50/100 Exponential Moving Average
  • Linear Regression lines
  • ATR (5)
  • RSI (14) or (6)
  • Stochastic (5,3,3) or (8,3,3)
  • Daily Pivots including R1/2/3 and S1/2/3
  • Weekly Pivot including R1/2/3 and S1/2/3

Make sure to include even the occasional and/or nice-to-have indicators.

Step 2: Prioritise

Priorities the items. If you don’t know where to start, try using the methodology below:

  1. Pick up your Trade Journal (assuming you have one) and go through all your trades.
  2. Filter the Winning from Losing trades (as we only need the winning indicators).
  3. With the list from Step1 and indicator list from your Trade Journal, identify the top 40% of indicators that have given you Consistent and Profitable trades.
  4. With the new list, pick only half the indicators and only pick indicators that have given you the Best trades. I’ve suggested half only as a guideline; feel free to pick only 1-2 Best Indicators if you feel that’s the case.

Step 3: Simplify

Base on Step 2, you now have a list of indicators with various levels of effectiveness. Note that all indicators work but we only want indicators that resonate with us and the list above is essentially it.

This last step is where you should re-write and simplify your Trading System i.e. Trading Rules. The rules on the new system should only include the 60% of indicators that you’ve identify in Step 2.3. Meanwhile, the Best Indicators from Step 2.4 should be mandatory in all your trades.

If you’ve done a comprehensive analysis of your own historical trades, you should appreciate and be confident about these indicators. If not, back test your new system before you apply them on a live account.

In case you struggle to write clear Trading Rules, do read my article for some guidance.

Repeat and Replicate

If you like the 3 Steps above, you can definitely repeat the same process and apply them on other areas of your trading. Some suggestions include:

  • Trading systems a.k.a. Strategies
  • Trading hours
  • Entries and/or Exits Management

You don’t have to do this exercise everyday but having a habit of doing it every 6-12 months will be sufficient. Remember that we need sufficient samples from your Trade Journal to apply Step 2.

Conclusion

The methodology I’ve applied here is a systematic approach to Decluttering your Trading System. More importantly, you do not have to learn anything new. All you’ve carry out here is picking up knowledge and information that already exist but making better use of them.

Pending on the number of indicators you have, the 60% may represent 6 indicators or it could mean 3. This really depends on what you’ve been using and the idea is not to attempt a radical change. Instead, we’re taking small incremental steps by focusing on knowledge and information that we are most comfortable with and leveraging on them.

Just to give you an idea, the following is one of the cleanest charts for my personal trading systems. As mentioned, in a clear chart, you can identify the market condition within seconds of viewing it.

(Click on Image for Larger View)

 

Hope you find this article useful. If yes, please feel free to share this with your friends.

Thank you for reading and happy Decluttering!!

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