A trading system is a set of rules that defines conditions required to initiate and exit a trade. Usually, most trading systems have many parts, such as entry, exit, risk control, and money management rules.
The rules of a trading system can be implicit or explicit, simple or complex. A system can be as simple as "buy sweaters in summer," or "buy when she sells." By definition, the system must be feasible. Ideally, the system accounts for "all" trading issues, from signal generation, to order placement, to risk control. A good way to visualize effective system design is to stipulate that someone who is not a trader must be able to implement the system.
In practice, every trader uses a system. For most traders, a system could really be many systems. It could be discretionary, partly discretionary, or folly mechanical. The systems could use different types of data, such as 5-minute bars or weekly data. The systems may be neither consistent nor easy to test; the rules could have many exceptions. A system could have many variables and parameters. You can trade different combinations of parameters on the same market. You can trade different parameter sets on different markets. You can even trade the same parameter set on all markets.
It should be clear by now that there is no single universal trading system. Every trader adapts a "system" to his or her style of trading. However, it is possible to draw a distinction between a discretionary trader and a 100% mechanical system trader, as compared in the next section.
4 Developing and Implementing Trading Systems