A trading system is a set of rules and parameters that define a trading strategy. A trading system generates entries and exits for a given security or asset. These entries are generated based on a set of buy and short rules, while exits are generated based on a set of sell and cover rules.
These four types of rules are generally technical or fundamental trading rules. The trading system entries and exists are also referred to as signals.
A trading system also contains several other parameters, which include the number of positions that are allowed in the portfolio, trading stops, initial equity, commissions...
The main advantage of using trading systems is that these systems can be backtested or simulated to determine how they performed in the past, and thus allows traders to make trading decisions with confidence. Another important advantage of using a trading system is that it takes all the emotion out of trading. In fact, once the trading system or strategy is developed and tested, the trader need to strictly follow its signals and forget about making decisions.
