COMPONENTS OF A GOOD SYSTEM
 
 
One of the common themes that emerge from reading Jack Schwaeger's books on successful market players is that all the wizards featured in the three books (Market Wizards I and II as well as Stock Market Wizards) follow a trading or investing system. Each and every successful investor has found a method that worked for him/her and has been disciplined enough to stick to it. They have no magic wand or do not possess the Holy Grail.
 
Success in trading is based on two components:
 
  • Adherence to the System.
  • The Investor's Psychology.
 
These two are so interrelated that they create a seem-less circle. A better system is always the result of improving the investor's psychology, viewpoint, and self-confidence. Conversely, a better psychology will help the investor adhere to his/her methodology consequently yielding better results in performance. It's virtually impossible to build a successful systemic environment with only one of these.
 
What are the Components of a System?
 
When selecting or creating an investing methodology, you must consider the following aspects: Entry, Exit, Money Management, the Market, and Personalization of the System.
 
 Entry - The entry point is based on a particular time or price where the investor would initiate his position in the market. Entry points are created based on a set of rules or calculations that are determined by the underlying method. A system should tell you the exact point where you should enter the market. This entry point could be either based on a particular market condition, a signal, or a combination of the two.
 
 Exit - The exit point is a method's criteria to exit the market and close out the existing open position. Before you enter the market, you should be aware of where your exit point will be or what conditions will cause you to exit. This can be accomplished based on:
 
 Target for Profit- Our exit point can be linked to a specific amount of profit, in either points or total amount. In other words, as soon as you make your intended profit, you can close out the position and never look back. Never looking back is very important as it insures that you don't get into the habit of "crying over what could have been".
 
 Stop Loss - An integral part of investing (like it or not) is loss. Some of our investments win and others will lose. What's so pivotal here is that you want to make sure that you don't risk your total equity capital on just a few positions. That's why you must establish a stop loss exit point for every position you take. There are two types of stop losses: one is a monetary. In this type, you decide on the amount of money you're willing to put at risk. The other type of stop loss is a technical stop, which is derived from technical indicators.
 
 Sudden, Unexpected Change - The savvy investor will observe any abrupt changes that occur in the market and act accordingly. An abrupt change in the market will certainly give rise to new or different stop loss plans. If you see that market conditions change (direction, trend or volatility as examples), you should exit immediately, regardless of any loss or profit. At this point profit or loss is secondary to simply getting out.
 
 Money Management - Money management deals with optimization of one's trading account and equity. An investor who overuses or does not properly utilize the available capital in his account is guilty of poor money management. Another important point about money management is that as one uses a system and assesses the resulting win/loss ratio produced, he/she should then adjust the position size and stops to optimize return on investment. You must look at trading as a long endurance race and not as a sprint. Money management also refers to full utilization of your money in your account. If you're not able to fully invest your money in the beginning, don't let it sit idly in your account. Put it to work in some Debt fund or Liquid fund and earn some interest!
 
 The Market - In general, you must have a feel for the direction of the market as a whole. It is very difficult for an individual stock to move higher in a market that's going lower. Of course, the opposite is also true. Always invest in the direction of the market.
 
 Your Personalized System - As an investor, you have to feel comfortable with whatever system or methodology you use. This comfort level can be evaluated by your system's performance over time. To ensure the success of a system or methodology, you must select or create a system that is compatible with your personality and individuality. It must recognize and honor those "blind spots" in you. A system that is custom fit for you is more easily adhered to, resulting in less "second guessing" or other discipline related problems.
 
Your system is literally your game plan; it is your recipe for success in the investing arena. And just like with any recipe, if you leave out any of the ingredients, the outcome won't be as anticipated.