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A trading system can be defined as a set of rules that are based on fundamental or technical analysis that signal trading entry and exit points. In general, a trading system's rules are based on the various technical analyses that generate feedback about the strength and direction of a trend as well as alert one to possible changes in a trend. Depending on the goal, a trading system may be developed to satisfy specific needs of individual traders or to provide a general system that can be subsequently customized.

Building a trading system based on the TSX Composite Index

A Trading System based on the TSX Composite index can be used to trade stocks of the public companies listed on the Toronto Stock Exchange. The TSX Composite index is a barometer of the Canadian stock market. By knowing this general index's trend, a trader may set rules that that will prevent the trading of Canadian stocks against the index trend. This may substantially increase the profitability of a stock trading system and reduce the trading risk.

During the development of a trading system based on a technical analysis of the TSX Composite Index, a developer must follow certain rules. First, the system must generate trading signals. There must be a procedure that describes steps to be taken in order to make trading decisions based on the generated signals. Secondly, a stop-loss and risk management strategy must be defined. Many of the trading systems incorporate additional systems to provide autotrade generated signals by transforming the trading system into a mechanical and unemotional vehicle.

The technical analysis that should be incorporated into a trading system must first be well-researched and thoroughly tested. Several indicators may be combined into one system. Then, the trading system must undergo testing, adjusting, and fine-tuning. Only then can a system trader realistically expect to auto-trade the signals generated by the TSX Composite Index trading system.