Articles
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Is Your Trading System Designed for You?
by Darrell Jobman
Stocks and Commodities Magazine, July 2006issue devoted to system trading, our author provides an overview of what system trading is all about. When shopping for a system, there are many key variables that must be examined if one expects to produce the same type of profits that have been advertised. This story will set beginning system traders on the right path to evaluate potential systems.)
Trading systems seem to be a magical lure for many traders, whether they are beginners attracted by a promotion piece’s promises of huge profits or they have been trading long enough to realize they need some help. After all, what could be more appealing than having something that tells you exactly what to do to make big money without much effort? Every trader’s goal seems to center on finding the perfect trading system. But first we must dispel the idea that there is a Holy Grail that guarantees success in trading, no matter what the hype might suggest.
“There is no single right answer regarding the viability of trading systems for individual traders – ‘Different strokes for different folks,’ as the saying goes,” notes Jim Wyckoff, senior market analyst for www.TradingEducation.com. “However, one universal response to anyone looking for opinions about buying a trading system is this: Don’t spend hundreds or thousands of dollars purchasing a trading system and think you are on your way to Easy Street. It is always a risk to put all of your eggs in one trading system basket.” That is not to say that trading systems do not work. The big question, however, is whether the system you select will work for you. That may depend as much on what you bring to the system as what the system offers to you.
What Is a ‘System’?
A mechanical trading system generates precise buy/sell signals based on a specific set of rules and conditions – the “if this, then that” pattern familiar to most computer users. The system may have many parameters or only a few, but whatever the structure, discretion is not part of the decision-making process. Every trade is prescribed by the system’s established criteria, which have been researched and tested to produce the best results. In a black box system, the parameters are not revealed; in a gray box system, the parameters and logic may be known but are not changeable. If the parameters can be altered, the result may lead to the development of a trading system or strategy, but the program may be better described as an analytical tool rather than a trading system.
Many trading systems are trend-following – the premise is that a trend in place will continue, and the parameters are designed to identify these trends, hopefully in their early stages. Other trading systems are based on detecting market reversals – the assumption is that a market is likely to revert to a central point after deviating to an extreme in a trading range or price channel. Candidates for trading systems include newcomers to trading who want exposure to a market but do not know much about the market or its trading instruments, traders who have floundered on their own and would like to rely on more professional methodology, or even successful traders who are trying to diversify into another trading strategy.
Why Systems ‘Succeed’
Whether you purchase a trading system or develop one of your own, they do offer several significant advantages to the trader. Here are a few:
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