Summary: Part 1 of a 10-part series. Transform vague trading ideas into a concrete, rule-based system that fits on one page. Covers entry, exit, filter, and testing.




Title: Trading System Construction Part 1: From Concept to One-Page Rules

Most traders fail because they trade ideas, not systems. An idea is "I think it will go up." A system is "When X happens, I buy Y quantity, place stop at Z, and take profit at W." This guide transforms vague concepts into a trading system that fits on one page.

1. The Three Non-Negotiable Components
Every complete trading system must have:
  • Entry rule: Specific, unambiguous condition (e.g., "price closes above 20-period high on 1H chart")

  • Exit rule (loss): Hard stop loss level (e.g., "10 pips below entry or 1.5x ATR")

  • Exit rule (profit): Take profit or trailing stop (e.g., "2x risk distance or 20-period moving average cross")


    • 2. The Filter – Your System's Gatekeeper
    Filters separate high-probability trades from low-probability ones. Examples:
  • Time filter: Only trade London-NY overlap (12:00-16:00 GMT)

  • Volatility filter: Only trade when ATR(14) > 20 pips

  • Trend filter: Only trade with 200-period moving average direction

  • Session filter: Avoid Asian session (low liquidity)


    • 3. The "One-Page Rule" Template
    Print this table. Fill every cell before trading real money.

    | Component | Your Rule | Example |
    |-----------|-----------|---------|
    | Pair(s) | | EURUSD only |
    | Timeframe | | 1H chart |
    | Entry Long | | Price breaks above previous 4H high + 3 pips |
    | Entry Short | | Price breaks below previous 4H low - 3 pips |
    | Stop Loss | | 1.5 x ATR(14) from entry |
    | Take Profit | | 3 x risk distance |
    | Filter 1 | | Only between 12:00-16:00 GMT |
    | Filter 2 | | ATR(14) > 15 pips |
    | Max daily trades | | 3 |
    | Position sizing | | 1% risk per trade |
    | News filter | | No trades 30 min before/after NFP, FOMC, ECB |

    4. From Rules to Routine – The Pre-Trade Checklist
    Before every trade, answer these three questions:
    1. Does price action satisfy my entry rule? (Yes/No)
    2. Are all filters active? (Yes/No)
    3. Have I already taken max daily trades? (Yes/No)
    If any answer is "No" → NO TRADE.

    5. Common Errors in System Construction
  • Ambiguity: "Wait for a pullback" is not a rule. "Wait for price to retrace at least 38.2% Fibonacci" is a rule.

  • Over-optimization: Backtesting on less than 100 trades gives unreliable results.

  • Missing contingency: What do you do after 3 consecutive losses? Write it down.


    • 6. Next Step
    Part 2 covers position sizing & money management – moving beyond fixed lots to percentage risk and the Kelly Formula adaptation for forex.

    Reference:
  • Elder, A. (1993). *Come Into My Trading Room*. Barron's.

  • Kaufman, P. J. (2013). *Trading Systems and Methods*. Wiley.