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Importance and Characteristics of A Winning Trading System

by TradingDrills Academy

We would like to discuss the importance of mastering the execution of a winning trading system, which is the second secret of professional traders’ success in the stock market and the overall financial markets! There are many different types of trading systems, and it is easy for new traders to get confused about which one to follow. Which one will yield more profits than losses and give consistent long term profits?  In this short video and blog page, we'll discuss in detail what the importance and characteristics of a winning trading system are. 

As we discussed earlier, a professional-minded trader understands that success in the stock markets as well as the overall financial markets relies heavily on the development of skills rather than just content knowledge. 

However, before mastering any process or algorithm, a trader needs to make sure that these skills are part of a well-designed, winning trading system.

This is similar to acquiring driving or flying skills, as one needs to practice using a safe and well-designed vehicle or airplane. All parts of the vehicle need to work smoothly together and be fully functional, in order to ensure its robust operation.

Profitable trading system

Therefore, it is important to fully understand the characteristics of a profitable trading system, which acts as a vehicle for a trader to gain consistent profit for many years.
A profitable trading system is known to have an “Edge”, also known as positive expectancy. This means that it will make more money than it loses in the market in long term. Trading with an edge is what sets apart professionals from amateurs in the financial markets. And we provide you this profitable trading system to learn trading in a safe environment. 

Profitable trading system characteristics

A Profitable Trading System has a “Positive Expectancy”:

Expectancy =  (Probability of Win * Average Win) - (Probability of Loss * Average Loss)

The edge of a winning trading system is derived from the combination of a higher winning rate and average wins/average losses ratio. Expectancy in trading is a very important aspect of any profitable trading system. 

Here's an easy way to see if someone is trading with an edge. A positive expectancy value (greater than zero) means that the trading system is profitable and has an edge. A negative expectancy value (less than zero) means that the trading system is non-profitable and offers no edge.

Profitable trading positive expectancy trading

How To Find a Trading System's Edge:

To find a trading system's edge, a trader must use historical trading data and the expectancy formula. To make things easier, we have a free Expectancy / Profit Factor Calculator on our website to do the math for you. In this example, we see that a trader who has started mastering the PPAT (Price Psychology Algo Trading) system has a track record of a 70% win rate, with an average profit of $150 and average loss of $100 trading S&P 500 e-mini futures. This generates a positive expectancy in trading of $75, which means that the trading system has an edge. You can also use the expectancy formula as shown below to manually calculate this trading system's expectancy, which gives you the same value of $75:

(Probability of Win * Average Win) - (Probability of Loss * Average Loss)
=
(0.70 * $150) - (0.30 * $100) = $75

Expectancy profit factor calculator

How does a Trader Master Executing a Winning Trading System? 

Trading algorithm for stock market success

The development of trading skills requires continuous practice on a positive expectancy trading system, which has an edge and is profitable in the market. For a long-term success in the stock markets as well as overall financial markets, a trader needs to master execution of the process and decision making algorithms of a positive expectancy trading system, which will be discussed in the next blog page of "Master Algorithmic Trading Processes."

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