How to Become a Systematic Trader: Beginner’s Guide | 915

There are three types of trading. The first one is the most common manual trading, where you take the direction bias based on your hunch and analyse the charts. Though it could seem quite easy, it might not be as profitable. You rely on tips, opinions, social media calls, or gut feelings. Sometimes these approaches produce short-term profits, but over time, the inconsistency becomes visible. According to SEBI, almost 93% of traders do not make a profit in the market. And most of the unprofitable traders are manual traders. 

The second kind of trading is systematic trading, in which trades are executed based on analysis rather than a hunch or gut feeling. In fact, the trades are executed based on strategies that have been backtested. Here, you can figure out the expected risk and reward of the strategy that you are running. Furthermore, you can also figure out the expected accuracy. 

The third kind of trading is high-frequency trading, which is usually done by big Institutions and market makers who provide liquidity to the markets. This can only be done with extremely complex infrastructure and substantial capital. Moreover, most of the time, traders need an exchange licence to execute trades extremely quickly. Retail traders will not be able to do high-frequency trading at their end.

Why Most Beginners Struggle in Manual Trading

When beginners enter the market, they face several challenges. 

1) The first challenge is that they keep trading based on their gut feel rather than a strategy. 

2) Another issue is that they keep changing the strategies frequently, as soon as some losses are incurred

3) Most times, psychology also plays a very critical role in the losses. Traders are unable to hold on to their profits and exit prematurely; on the other hand, they hold on to their losses, hoping the market will reverse.

4) Another problem is discipline. A lot of trades are taken due to FOMO, which leads to inconsistent results.

What is Systematic Trading?

Systematic trading means making trading decisions using a defined framework. Systematic trading essentially means that all the trades are taken based on predefined rules. The predefined rule consists of entry conditions, initial stop-losses, initial targets, trailing stop-losses, and other exit conditions. Moreover, systematic trading also involves capital and risk management. If the strategy requires pyramiding or averaging, that is also part of systematic trading.

Here are the steps that beginners can take to become systematic traders:

Step 1: Define a Clear Trading Objective

Systematic trading works only on predefined strategies. But even before the strategy is defined, you will have to define the objectives. For example, you must decide whether to trade intraday or swing, and whether to trade in equities, futures, or options. You should also decide on the time frame and the capital size for the strategy. Finally, you should assess your psychology and create a strategy based on that.

Step 2: Build Rule-Based Entry Criteria

The next step is to create rules for the entry. You can choose from a range of strategies, such as breakout trading, range-based setups or volatility trading. Ensure that the rules are extremely objective, meaning that the time frame, the conditions under which trades will be taken, risk management, money management, and the required capital are specified. If rules are unclear, decisions become inconsistent. Clarity allows evaluation of performance.

Step 3: Define Risk Per Trade

Systematic trading works only when strong risk management is in place. Hence, ensure that the initial stop-loss is specified in both points and rupees. Rather than just focusing on the profits, focus on risk-to-reward. Controlled risk allows survival during difficult periods. Survival allows long-term growth.

Step 4: Maintain Consistent Position Sizing

One of the main reasons beginners lose money is that they quickly increase their position sizes once they start making profits. Systematic traders maintain logical position sizing methods. Find the correct position size based on the risk per trade, account size and market volatility. 

Here is one example:

Capital = ₹2,00,000

Stoploss = 50 points (from step 3)

Risk appetite = 2% per trade = 2% * 2,00,000 = ₹4,000

So the trader should trade with 4,000/50 = 80 quantity

Market volatility is very important and can be tracked using ATR. If the ATR is high, the trader should reduce the position size because it increases risk.

Step 5: Exit Rules

The next step is to define the exit rules. The exit rules can be based on the stoploss getting hit, the target getting hit, the trailing stop getting hit, or some other condition being hit. This is also the time to define whether you will opt for re-entries and the maximum trades per day and per strategy.

Step 6: Track Every Trade

The trades need to be tracked and evaluated. All systematic traders maintain a detailed journal in which they record the entry, exit, stop-loss, target, and trade timings. They also record the market conditions and the emotional state at the time the trade was taken. Tracking improves awareness. Awareness improves decision-making.

Furthermore, you should also periodically evaluate your strategy's performance. Some traders also backtest the strategy, which can provide insights into how it might perform in the future. Traders can also automate their trading systems to avoid emotion-based decisions and execute trades efficiently.

Summary

Contrary to popular belief, systematic traders do not aim to win every trade. The main aim is to follow a process and strategy they truly believe in. The belief in the strategy can come from doing backtesting and experience. The main benefit of going for systematic trading is that consistency improves over time, and there is structured thinking rather than emotional reactions.