I have been around this site for a couple of years and I do not know realy why, but I would like to give a step by step instruction about building a âmechanicalâ tradingsystem. I do many things in live, not knowing why so, here it goes: First of all some ârulesâ. I will answer questions but however I will not discuss endless point of views... Please do not PM with all sort of questions, I rarely open that, just use this treath. I would also like to tell you that English is not my natural language, thus be kind with my spelling. I would like to give a brief summary of what is coming: First I will make a trend following system and later on a non trend system. What are the things I need to build a trend system?: A filter to know what market condition Iâm in. To me there are 9 different market conditions: high,low,midlle volatility and up,down,side ways marketdirections or any combinations of these two measerments. Now how do I measure volatility? Average True Range does the trick, but you could also use raw data like the difference between high and low on any given minute/ day/week/month and compare this with other periodsâ¦ Lets keep it simple and use Average True Range to measure volatility. Second thing I need to know is the direction of the market: Is it up, down or sideways? You can use many things for this, you could use a counter to count new highs or lows, DMI indicator for direction and so on. Or even simple movingaverages. Lets use three simple moving averages to determine market direction. (200,50,20). When the 20 > 50 and 20 > 200 and 50 > 200, then I would clasify this as âuptrendâ, when 20 < 50 and 20 < 200 < and 50 < 200 then I would clasify this as âdowntrendâ. Everything in between, is a no- no for the trendsystem. So far the marketfilter. You could also ad volume to measure liquidity of the underlying instrument to your marketfilter, but that depends on what you are going to trade. Now letâs talk about some other things we need: Entry signals Exit signals Moneymanagement Monte carlo simulations to determine what we can expect from our system. Portfoliomanagement Entry signals: There are many, many possibilityâs for an entry signal. A good entry signal makes you profitable from the start. (Most of the time, anyway) Also it exist about two things: a setup and a trigger. The setup is used to make you ready and the trigger is to get you profitable from the start. For a trendfollowing system the most important thing is to set you up with a low risk entry. This can be a retracement in the trend(setup) and suddenly a movement with the trend(trigger). For this example I will use a three lower high for the setup and buystop of the priorer high for the trigger, when we are in an uptrend. In an downtrend it is the âmirrorâ of these signals. This is just an example, you can use your own ideas for this. Note: Uptrends and downtrends are not the same, but for simplicity Iâm going to say they areâ¦ Exitsignals: Exitsignals in a trendsystem are different then in a nontrend system. The purpose of a trendsystem is to be in as long as the trend âexistâ and exit when this end without given to much profit away. To make it worthwhile to use a trend system, you must also have a low risk point in your system: First exit: Stoploss: This is to âprotectâ your capital, lets say that you choose a point where you know you are wrong about your entry. In this example it could be the low of the prior bar when you had your entrytrigger. Second exit: In a trend system it is important to give the underlying some room to develop. Too ânarrowâ you exit premature. Too âloseâ you let a lot of profit on the table. So find something that locks profit in at some point. The best exit is some form of trailing stop for a trend following system. This could be a 20 day low exit or somekind of ATR of the high, low or close. Lets use a 2 x ATR of the close in this example. I will stop here for a moment to see if someone have some questions. In the next part I will let you see the most important things, like moneymanagement, monte carlo simulations and portfoliomanagementâ¦ Daniel.