The Road to Successful Trading

Chapter 5: Trading System and Trading Rules 
The word Paradigm refers to a thought pattern in any scientific discipline or other epistemological 
context and is focused on analyzing the nature of knowledge. When a trader develops a trading 
system, they develop a paradigm to formalize a process of choosing a trade candidate, selecting 
entry and exit points and post trade analysis and feed back loop into the trading system. 
Typical Paradigm for a position trader 
How to Design and Construct An Effective Trading Plan 
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Regardless of the style you may choose to trade with, there is some commonality to almost all of 
the trading styles. To be able to analyze a potential trade, there are two general types of analytical 
philosophies that most traders consider in tandem with any screening and analysis. The two are: 1) 
Fundamental Analysis and; 2) Technical Analysis.
These two philosophies are not mutually exclusive and are usually used together to help the trader 
select a successful trade. These two approaches are not natural laws of nature and they are in a state 
of endless “tweaking” as each trader hunts for a “secret formula for success”, which is usually 
guarded as closely as a secret love affair with a close relative. Many books and articles have been 
written on both approaches, but the fact that both are based on past history underscores that there is 
no guarantee that history will repeat itself; therein lays the risk to all investors and traders because 
the future is nothing but a probability.
“Never try to time the market” is one of those clichés one constantly hears but in the world of 
trading it’s all about timing.
As a quick side track, let’s take a few minutes to review these important schools of approach to 
analysis. 
Fundamental Analysis 
Equities fundamentalists look mostly at the financial information about the company, which is 
similar to a doctor reviewing a blood test. The company might look healthy on the outside but its 
financial numbers may reveal something else. Fundamentalists also like to look at the “story” 
surrounding the company: is there a new product coming out which will knock the socks off the 
competitors?; is the SEC about to investigate the company?; has the company just entered into a 
risky strategy?, what affects will a corporate restructuring have on the company?, etc. A 
fundamentalist will throw all of these factors into the mix and subjectively weigh the risk-reward.
Because the fundamentalist philosophy is probably more appropriate for investing (long term), we 
will not go into great detail but touch upon some of the important sources of financial information 
that even an option trader should understand.