Building a trading system

Njabulo Nsibande Latest, Village Trader

Having a trading plan is vital for success in trading and investing. The question is how to create one. Here’s my plan as an example.

Let’s first discuss the purpose of your trading system or plan. It’s simply a map of your end goal, with it helping to guide you towards it. So, when building a trading plan, the first question you have to answer is, what’s your goal?

Specify your aim

There’s an old philosophical saying: “You see what you aim at, and are blind to everything else”. Psychologists have designed many experiments to prove it – the famous gorilla experiment is one example. The importance of specifying a goal helps chart the path you ought to take and the blindness that comes as a consequence of having your aim is quite useful. It eliminates a lot of paths that would take you away from your aim, in other words, what to say no to. It’s okay if it’s not 100% clear in the beginning, don’t worry. With time the fog will clear as you learn.

Footnote: You will miss your aim madly in the beginning, but with more attempts, you will have better and better misses that bring you closer and closer to your target.

What’s my aim in the market? 

I aim to find the one or two stocks that will double and triple in price and hold those in size. That aim helps me ignore all the stocks that have a low probability of doing that.

Solving the puzzle

Markets are a fun puzzle game. When your aim is set, next look at solving the puzzle. When putting together an actual puzzle, it’s a good idea to start with the border pieces first. Partly because they are easy to spot. They have at least one solid flat side. Starting with the borders helps because it specifies the boundaries in which you can work. Similarly, when developing a trading plan, you have to get your borders in first. These will serve as the foundation of your plan

What are the edge pieces?

  • My universe: 50 day EMA > 200 day EMA & price > 200 day EMA = Long. I ignore everything that doesn’t fit these criteria.
  • Risk & money management (position sizing): Every trade starts as a 1% bet. How I feel about the trade or how confident I am on the trade is irrelevant. I play no favourites. Every trade is a 1% bet. As the trade moves in my favour I pyramid to the position, following an algorithm (we’ll discuss the algorithm another time).
  • Acceptance: Accept that as a result of having these boundaries there will be other opportunities that would have 10x your portfolio and you will miss. Accept what’s within the field of vision and don’t stress about what’s outside. This is not to say you can’t expand your field of vision, as you can and should. However, that shouldn’t come from FOMO, but through learning from experiences and practice. Remember, slow and steady wins the race.
  • Commitment: The market is like a train that continuously runs in circles with intermittent stops to give its riders a chance to get on or off. As a result, it offers continuous opportunities, which you can only see if you are there. You can’t just be involved in solving the market puzzle. You have to be committed to completing the puzzle. For without the commitment, there’s no way you can finish the puzzle. Think of a 1000-piece puzzle for example. There’s no way you will complete the puzzle unless you commit to its completion.

The above is for the sides of the puzzle that will help you zero in on the rest of the puzzle. You can then go layer by layer till your puzzle is complete.

Visualisation

With every idea that springs into your mind, as you learn and develop as a trader and an investor, visualise how that idea would react to every market circle. Start to experiment with your ideas – your entry strategy, exit strategy, trade management etc. Once you have the vision of how your ideas would react to different market circles, you can try out the ideas you think would work and see what happens. If they don’t, learn from that experience, reformulate your ideas and try again. The purpose of the visualisation exercise is to let your ideas die instead of you.

My Style

I’m a long-only position trader. My goal is to find the one or two stocks that will double and triple in price. I then try to build a long-term position on those stocks. That filter creates my universe and eliminates markets/stocks that won’t do that. 

Moving averages give me a strong sense of direction because they track the trend. I found the 50-day EMA & 200-day EMA to be quite reliable. Before a stock can 10x it has to 1x first. On its journey to 1x it will have to pass these moving averages and the 50-day EMA will have to go above 200-day EMA. Within my universe, I look for stocks that break the levels they previously failed to break (Support & Resistance). That shows their strength. I then look for similar levels on the downside to place my stops.

My Rules

  1. Buy only if 50 EMA > 200 EMA & price > 200 EMA
  2. Only exit if my stop loss is hit
  3. If a trade goes in my favour add to it, if not, well the stop loss will take care of cutting it short
  4. Use position size algorithm for size on every entry (a subject for another time)
  5. Buy high, sell higher
  6. Scan the market each day after the close
  7. Don’t trade if my head is not in the right place

How will my plan behave in different cycles?

It should be profitable during a bull market, should be flat to modestly down during a flat market and in cash during a bear market, but I don’t trade bear markets. I hope this article gives you a foundational base on which you can develop your swing in the market.


Village Trader blog

Njabulo Kelvin NsibandeTraders share a peculiar characteristic: they’re fiercely competitive, but only with themselves. In practice this means that they see every outcome as an opportunity to learn, and they’re brutally honest about both their failures and successes. This also means that they’re hungry for knowledge. They don’t sleep easy with unanswered questions. And they’re seldom satisfied with just one answer.

Njabulo Nsibande is a founder of Village Trader, and Sakha Ingcebo investment club. His interest in trading began in 2016, alongside a rash of Instagram ‘fx traders’…

Find him on Twitter: @njabulo_goje.


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