Before you buy a home to live in, it's best to decide on what you need before you fall in love with the wrong house. For instance, you might need three bedrooms. In the same way, it's extremely beneficial to figure out what you need in a trading system. Today, we'll show you exactly what you need from your system before you embark on the quest.

Method of Entry

Be sure to develop a system which details exactly how you will enter and also takes into account commissions and slippage. If a system cannot overcome slippage, then why trade it? Remember that short-term trading is affected more by transaction costs than long term investing because of the increased activity. Therefore, commissions and slippage is an important factor when developing your system.

Risk Control

Almost any system can be ruined if risk control is not considered. After all, Warren Buffet didn't buy $40 billion worth of Anheuser Busch, but $2 billion instead. Even Warren uses a certain risk control, because after all, it's possible that Anheuser could go bankrupt. In life, it's good to be an optimist. But excessive optimism in system development can easily lead to ignoring the risks and the weaknesses to you trading system. All systems have weaknesses. Make sure your systems has a risk control element to it.

Systems sometimes have a limited lifespan. For instance, if you'd developed a system using data from 1991 to 1999, that system probably didn't fare as well from 2000-2002. It's important to consider how your system would be affected by a bear, bull, or sideways market. When should your system do well? When should it perform poorly?

The Right Data

Beyond the obvious data that you need such as price and volume, you can consider much other data as well. For instance, you might be looking at ADX and RSI, but what about the SPX and the NASDAQ? What are they doing? You can use software such as Trade Station that allows you to test how ADX performs while the SPX is above the 200-day line, for example. Think about other data that you can use in conjunction with your normal historical price and volume data. But, be careful, because too much data, may leave you overwhelmed and could force you to quit. Monitoring You are not off the hook after developing your system. You should outline beforehand exactly how you will monitor and improve your system. You should also answer this important question in advance: "what must happen in order for me to change my strategy?" This will protect you from changing your strategy based on whims. We also recommend getting a trading buddy to report to once a month. It's amazing how much insight you can receive from having a friend ask you questions about your system and make comments on your trading. There are some of the aspects of a good system that you should look for, but there are more as well. Constantly seek to improve.

Price Headley is the founder and chief analyst of BigTrends.com.