At their core, algorithms are simply a set of rules designed to perform a specific task. If you bake cakes, the step-by-step rules (recipe) you follow to get from ingredients to dessert — that’s an algorithm. Rules bring order. They help the universe function as it does. In trading, algorithms provide the structure and discipline traders need. This structure is often referred to as a trading system or trading model.
A trading system is essentially an algorithm you develop to buy or sell a particular security at a certain price or level in the market. These systems are typically built based on historical market data or research-backed insights into market behavior.
Some traders use written trading systems while others prefer to automate their systems by coding them into bots or agents that trade on their behalf. Which approach is better? It depends entirely on the trader.
If you can follow a clearly written set of rules and don’t have the time or skills to code, then a manual system may suit you just fine. On the other hand, if you struggle with discipline or get overwhelmed under pressure, and you have the technical know-how, then automation may serve you better. If you’re someone who thrives in both areas, then coding a bot could give you the best of both worlds.
What matters most is consistency. Whether you’re trading manually or using a bot, your chances of success are equal — everything else being constant.
Key Characteristics of a Good Trading System
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Simplicity is key.
Trading systems should be easy to understand and execute. Remember, algorithms are simple sets of rules — not complex set of rules. Simplicity makes the system easier to follow, maintain, and improve over time. -
Systems require refinement.
Markets change, and your system should adapt. Regular refinement helps the system stay relevant. The simpler the system, the easier it is to tweak without breaking its logic or structure. -
No system is perfect.
Just because you spend a month building a trading system doesn’t mean it will produce perfect trades. A system should execute flawlessly in terms of logic — that is, it should follow your rules without error. But that doesn’t guarantee performance. Even the best systems will have losing trades. They offer a probability of success, not a certainty. So avoid chasing perfect systems — they don’t exist — and beware of anyone promising guaranteed profits. -
Systems create structure in a chaotic market.
Financial markets are noisy. From economic news and candlestick patterns to sentiment swings, forums, and self-proclaimed “gurus,” there’s no shortage of distractions. A trading system brings order to this chaos. It tells you what to look for, when to act, and how to execute, so you don’t get swept up by every passing signal or opinion. -
Trading systems need time.
Don’t judge a well-researched system too quickly. Give it time — three months, six months, even a year — to assess its true performance. Markets are dynamic, and short-term results don’t always reflect long-term potential.
