The term trading system has different meanings to different people in the realm of securities trading. Systematic trading can be as simple as a single indicator and a stop-loss rule. In fact, most folks in the technical analysis field now refer to any trading regime as a system, even when it doesn’t meet the strict requirement of full automation. But a trading system, in the strictest sense, involves every decision being dictated in advance by the indicators and trading rules that you set down.
A trading system is built, block by block, by accumulating trading rules to convert indicators or other data inputs into buy/sell signals. A trading system becomes a robot when it executes the trades, as well as determines them. These decisions include position size and other aspects of the trading plan.
A trading system is a mechanical trading system when it dictates every single decision, leaving no latitude for the operator to inject a subjective decision. Definitions for a mechanical trading system vary, but most systems designers would agree on the bare minimum:
You backtested every indicator and combination of indicators over a large set of historical data and have determined that the indicator set generates a favorable gain-loss ratio.
The system contains enough trading rules so that whatever the contingency, you never need to make a judgment call. You have already provided directions ahead of time.
You really can’t establish this feature in full because of highly improbable events. Programming every contingency into trading rules is a vast and probably impossible task.
You follow the system without fail and without overriding the signals by using judgment. You take every trade that the system gives you, if only because you never know which signal is the one that’ll generate the juicy profit. And in most systems, the successful backtest track record depends on those big profits to offset many small losses.
Building a mechanical trading system is a major undertaking that requires knowledge of statistics, computing, and risk management, as well as technical trading methods. You could spend years developing a comprehensive mechanical trading system, and many people do.
Start small. Review various indicators and their associated trading rules. You can develop a buy/sell system fairly easily, choosing indicators that seem logical and workable to you, and then adjust the trading rules until you get a satisfactory hypothetical gain-and-loss profile. Hypothetical is the right word because the chief reason to combine techniques in a trading system is to backtest indicators and trading rules to see how they would have worked in the past. For all its faults, backtesting is the only way to know whether an indicator works on your security. After you find good indicators and rules, you can take them out for a trial run in real time.
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Source:http://www.dummies.com/how-to/content/using-a-security-trading-system.html
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