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Jayesh Patel

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My Trading System

I am currently reading a book "Trading for a Living" by Dr. Alexander Elder. Dr. Elder is a psychiatrist who seems to be vary much interested in trading psychology and trading systems.

What sets this book apart from most others on stock analysis is the professional background of the author. Most investment or trading books usually talk about trading strategies or market analysis. This book however also focuses on often neglected component of a successful trading system and that is psychology or behavioral part of trading. I particularly enjoyed chapters on trading psychology and found them useful and practical. I would strongly recommend this book to those interested in trading. Click here for some notes or go to the bottom of this page, or best, go out and buy this book. You may also find it on Half.com or on eBay!

This book has made me aware of some of my weaknesses and has prompted to approach trading in a more systematic way. I want to formalize and document my trading system so here it is.

Dr. Elder emphasizes that a success of a trading system depends on three pillars:

  1. Trading Psychology
  2. Trading Strategy
  3. Money Management.

I have been investing (not trading) in stocks since I was in college. However in mid 90s, I founded a stock brokerage firm in India and got a seat on India's biggest stock exchange. This is when I got in close contact with functioning of a stock exchange, various trading strategies of traders and real time stock quotes and order executions in front of my eyes. I guess this continuous closeness to market fluctuations and interactions with many traders (most of them losers) attracted me and before I could realize, I was also hooked to trading like many others. During those 3 years, I traded a lot and lost most of the time. As Dr. Elder points out in his book, I was an addict to trading. Like an alcoholic, I was not able to control myself. I didn't have a formal trading system either. I wanted to get rich quickly, but I kept losing most of the time. This was frustrating. Many times I decided to quit the game but I could not quit either. I was no better than an alchoholic. This is the time I moved to USA and brought an end to my trading. (Not all was bad in those three years. During last few months before I left India, I came in contact with a trader. He explained me a unique trading strategy. I was impressed by its simplicity, logic and scientific approach. Initially I was keeping records on paper and then I learnt PowerBuilder from a friend and created a program. If you have visited Trading Lessons on my Website, probably you know what I am talking about.)

Though I have a pretty good trading strategy (item 2 in the list above), I lacked the other two pillars of a sound Trading System. Trading is a short term game (rather a war between buyers and sellers) where our emotions and money management skills play as crucial role as a trading strategy in our success or failure. When I was trading in India, I was a hybrid animal- some part investor and some part trader. I would enter into a trade many (not all) times as in investor. If the stock moves in favorable direction, like a trader, I would book my profit. However if it went contrary to my position, I would turn into an investor and hold on forever! So my profits were usually small and losses were devastating. Small profits in few trades would boost my confidence and make me feel like the smartest guy! Then I would take a much bigger position and lose all. I guess this is not only my story but is of most traders.

I don't want to waste your time in my history. Following is my proposed trading system with some inputs from above book.

Trading System

Money Management rules:


Trading Psychology rules:


Trading Strategy:

(I am going to put all my trades on my TradingIdeas message board as soon as I make one. I guess if I make them public, it would work as a control on my psychology and behavior. Also such a message board is a good alternative to a paper based record keeping. Thank you all.)

Disclaimer: This page is not intended to encourage anyone to trade. This is a trading system for my personal use and it may not be appropriate or suitable to your financial conditions, financial objectives or circumstances. The trades I post on my message board are for record keeping purposes and not a recommendation nor an invitation to anyone to trade. However you may use any material on my Website or opinions and thought on my message board if you find them suitable and appropriate for you. You may also watch my experiments in my TradingLab (TradingIdeas). Please remember that trading stocks is very risky and needs a disciplined approach, self-control and significant experience. In short, I don't know a lawyer's language nor can I hire one for this purpose but I do want to adequately warn you. You are solely responsible for consequences of your trading decisions.

Some more notes from the book:

Triple Screen Trading System

  1. Identify the weekly trend using a trend-following indicator and trade only in its direction. (EMA, MACD, MACD Histogram, Trendline etc.)
  2. Apply an oscillator to a daily chart. Use daily declines during weekly uptrends to find buying opportunities and daily rallies during weekly downtrends to find shorting opportunities.
  3. Use the trailing buy-stop* technique when the weekly trend is up and the daily oscillator is down. Use the trailing sell-stop technique when the weekly trend is down and the daily oscillator is up.
    * Place a buy order one tick above the high of the previous day.