System and strategy

System and strategy - often confused concepts, how do they differ? They seem to be similar, they have something in common, but it's not quite the same. Or maybe it is better to write that one is contained in the other, or the other is a supplement to the first. Either way, it is worth knowing what the difference is and what elements should be included in the system and strategy.

What is the system

The system, implicitly transactional, is a set of guidelines that the investor set up when making investment decisions. It is primarily associated with determining entry and exit points from the market. To create a system, the trader develops a given methodology. It lists the conditions that must be met for a given item to be bought or sold. Next, things like the region of the arrangement must also be included Stop Loss, Take Profit and Trailing Stop or if they do not use them, other indications that will determine where to end the transaction with a loss or make a profit.

READ: Profit-taking order, i.e. how and where to take take profit. Part 1, Part 2

In strategies based on technical analysis indicators it's usually easy to write everything down, because these types of tools give very readable signals and just wait for the combinations of characters they will generate.

With more subjective methods such as formation analysis or wave theory, where everybody independently assesses the eye when given conditions are met or not, it gets a little harder. It is difficult to specify the exact conditions of conduct, especially for beginners or people without any experience. It will be similar with getting good results immediately with such methods. This is due not only to the problem of correct formation identification, but also to the lack of clear guidelines. It often leads to unnecessary combining and complicating the situation.

What is a strategy

The system is part of the strategy. So what is strategy? The strategy, in addition to proceeding when it is necessary to buy or sell a given asset or dispose of it, also contains additional features. Defines how to secure the position (which is what results from the system) and, above all, capital management. This is a fixed percentage of risk per transaction, per series of transactions or the maximum allowable loss in a given period. It is also a defined short- and long-term goal that we want to achieve (most often the rate of return). The complete strategy also defines at what times we will play, on what instruments or with what additional tools. This is all that will be used when trading with ready-made rules for dealing with crisis situations, such as approaching a level margin Call or after noting a series of failed transactions. The strategy can even include the possible payout frequency and / or thresholds at which we can do it. It is also an element of risk management.

The system itself is definitely not enough to be able to succeed on the market. There is no one without one.