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Stock Trading Rules vs Trading System

March 15th, 2016

Hey this is Sasha Evdakov and thanks for joining me this week at Tradersfly.com, where I share with you some insight about trading in the stock market.

In this week’s episode what I’d like to do is share with you some insight about Trading Rules and Why You should have Trading Rules and what’s the difference between Trading Rules and Trading Systems.

Starting with Trading rules and Trading systems

To get things started, let’s take a look at the trading rules and trading systems, so here if I have two things that are overlapping and in this section I’ll have rules and in this section I’ll have my system.

If we start looking at both of these things, when they overlap, this in part is your whole trading atmosphere; this is all the actions that you do in trading.
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The rules here, your trading rules are actually things that are you, they are in part to help you trade. They’re internal to you personally. So these are the things that dictate what it is that you personally can and cannot do.

Now, the trading system over here, this is really all about your strategy and it’s also about the way that you trade. It’s basically your method to getting in and out of stock trades, to managing your money, it’s your system.
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If you’re still a little bit confused between the rules and the system, let me give you a little bit of insight and examples or the difference between rules and systems, and maybe it’ll give you some insight to what kind of rules you want to create for yourself.

Examples to guide you

For example, one of the rules that I have, in terms of the things that I follow is I don’t trade pink sheets, or the over-the-counter stocks. Another rule that I may have is that I do not chase a stock that’s up 5 or 10 percent.

To give you another example, the rule that I have is to never move my stop.
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These are just a few examples to give you some insight about trading rules. Now back when I first started trading, I used to mix my rules and my system together, I always thought of rules as being rules and the system as being part of the rules.

The difference

I used to merge them together but now over the years as I look at things a little bit deeper, I’ve really realized that the rules are very different and separate from the system.

How is it that they’re different? Well the rules again, they focus on you. They’re internal for you. Whereas the system as we start getting into the system, the system is all about the way that you trade and you can have a lot of variations to the system.

Some people have a system to trade based on like moving averages, so what they may end up doing is when they’re trading based on the moving averages, because that’s their system, they may get in it once it breaks above the moving average and get out of it once it breaks below moving average.

There’s absolutely nothing wrong with that, in having that kind of system.

Other people trade patterns, so they may have a pattern system. So what’s a pattern system? A pattern system looks for specific happenings or events, it could be something like where the stock is up five times or ten times in a row and then you get into the trade.

It might be something if where earnings beat a certain amount, then you go ahead and enter the trade. So that’s what the pattern system is, is it’s looking for either gap ups, it’s looking for if a stock is up.

The other way, if we’re looking at a moving average, this in fact is a different type of system. This is really a trend system.

In reality, when we boil things down we have two different types of systems, we have a pattern system and a trend system. A trend system, just like the moving averages tells us the trend, what direction things are moving in, are we in a bullish state, are we in a bearish state, it’s looking for a support and resistance and how those stocks are moving.
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It’s looking for the direction of those stocks and it’s where they’re moving. Our stocks creating higher highs and higher lows, or are they creating lower highs and lower lows. That’s what a trend system is.

Those are the two different types of systems. When you start choosing or picking your methodology for trading, when you start picking your way to enter and exit trades, it’s all based on the system.

However, just because a stock is breaking a moving average or you’re using a trend system or a stock is created an up movement five times in a row for a pattern system.

Now you’re ready to enter the stock, if on that fifth day it’s up extremely high and it’s up more than five or 10 percent because of your rules your personal rules state that you do not chase a trade then you wouldn’t enter that trade because your rules state you don’t chase the trade.

As you can see how the rules and the system work together for your to create your trading methodology, for you to create your whole plan within trading.

Statement of Points

That’s the breakdown behind trading rules and trading systems, the rules are really internal, internal to you personally and what it is that you are going to be able to do or not be able to do.

For example, another rule might be that you do not take another trade in that stock if you already loss a certain amount of dollars and that is just because it keeps you personally clear minded.

The system on the other hand, is the way that you enter and exit trade it’s your methodology, it’s your trading way.

So, if you’re getting into a pattern system, you look for a specific happenings, you look for events and you look for patterns to evolve and happenings to evolve before you enter and exit stocks.

If you’re looking for a trend system, you’re looking for trends, movements and certain directions. How are those stocks, how are the indices moving and in what direction are they moving, what’s the trend, how does the channel look.
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That’s what you’re looking for in a trend system.

These two things, when they merge together and they work together they composite and create your trading plan.

In the end, what’s the point behind these two things? “Why?” why do we want a trading system or why do we want rules, what’s the big deal behind these things. Well, really it comes down to one main thing at least for me.

For me it comes down to one main thing and that is to keep me out of trouble, it allows me for the rules to stay in my game. It keeps me out of huge loses.

Whereas the system, right here allows you to be more consistently or find your consistency, whether you’re consistently losing or consistently making money, if you’re consistently losing then you probably need a new system.

If you’re consistently making money then you stick to that system for choosing your stocks, for getting in to the right patterns for trading that same way because you’re consistent but if you’re not following rules and you’re constantly emotional, you’re constantly chasing and you’re not following your system then you need to work on yourself.

And a lot of this has to do with the inner game mentality, if you’ve heard me talk about that.

The rules is really all about being disciplined and if you don’t have the discipline in the markets, it’s really going to burn you and burn your account.

Thanks for joining me in this week’s video!

Author: Sasha Evdakov

Sasha is the creator of the Tradersfly and Rise2Learn. He focuses on high-level education speaking at events, writing books, and publishing video courses on business development, internet marketing, finance, and personal growth.

I'm Sasha, an educational entrepreneur and a stock trader. In addition to running my own online businesses, I also enjoy trading stocks and helping the individual investor understand the stock market. Let me share with you some techniques & concepts that I used over the last 10+ years to give you that edge in the market. Learn More

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