Systematic Way of Trading - Stock Board Advice

After I post the question Should I Short Baidu at $318 on yahoo stock board I got an advice on the board that I think is an honest opinion and worth to think about. It is from a trader with screen name jlin303. I wish the answer can be post on this bog so I quote the advice here. And once again I am grateful for the advice.

Well, I certainly wish you the best of luck. Just one last piece of advice.. I’m sure there are day traders here who make money by day trading their instincts and feelings but I, for one, am a system trader. I’ve spent many hours researching various technical and fundamental indicators, programmed a system, and then spent many more hours back testing and refining the system until I felt comfortable with the win rate, draw downs, and many other factors. I use a Kelly Criterion approach to size my trades and it’s been working well for me.

Here’s the thing: after reading through your blog, I don’t think you can honestly say you’re a long-term winning trader, in part because you’ve lost so much, and also partially because you just don’t have a long enough history to say confidently that it’s not because of variance. I suggest you look long and hard at a systematic way to trade, whether it’s through automation or manual trading. You need very specific (and proven) sets of rules and then you need to stick to them. Asking people on the boards is not the ticket. “I want to short BIDU because I FEEL it’s gone up too much” isn’t a specific proven set of rules. If you put on this trade, do you know what your chances of making money and losing money is? How much should you risk (stop-loss)? What is your exit strategy if you make money? etc.

My answer would be something like “I’m shorting BIDU because the price fell below the 5-day and 10-day EMA today on heavy volume. My research has shown that in the last 5 years, when this has happened, it goes down 10% on average about 70% of the time and it goes up 3% and average of 30% of the time. My bankroll is XXX so based on the Kelly Criterion, I’ll risk YYYY to make ZZZZ dollars. Once the price crosses the 5-day average again (moving up), I’ll be out the trade. I expect to make TTTT amount of money in the long run by putting on this trade, based on historical results.”

You seem very genuine in your quest for knowledge so I broke my silence to talk to you. Usually, I would just browse the boards for a light chuckle at those pumpers and bashers who make ridiculous farcical comments and then try to substantiate their positions by making outlandish claims about the size of their trading accounts and how much they’ve made.

This is my last post on the subject so good luck and never stop learning.