Why System Trading ?

StocksandSignals · Joined: 25 Feb 2007 Posts: 2

Why system trading?

Due to radical advances in technology, such as the proliferation of personal computers and the ability to instantaneously access market information globally, phenomenon of making trading systems became prevalent in the investment world. Development of different trading platforms helped us to test virtually limitless buy and sell rules on decades of historical market data and assisted systematic traders to increase returns and reduce risk.

The key in making a system is every system must start with a basic assumption, an idea. If that has a solid foundation the system has a chance of working. One of the main reasons why many systems fail is that developers create them just by data mining for patterns without understanding why these patterns create. Moreover, systems that make a small number of trades showing good results during back testing period could be over optimized and will not work in future. Those conditions will never appear again causing system to stop being profitable. Only systems which trade a lot and still make consistent profits throughout back testing will make money in real market.

There are traders who think they can more accurately "predict" what the market will do rather than follow a proven system. They are trying to draw different shapes on their charts but all this is just wishful thinking on their part. The brain comes up with all sorts of "patterns" out of seeming randomness. They begin creating weak models which did not take many things into account. All this causes them to rely on emotional decisions and lose any discipline in executing less rule-based discretionary trading which can never be qualified and, eventually, brings great losses.

Back Testing of any trading strategy, discretionary or mechanical system, is imperative, because it helps a trader separate good trading ideas from bad ones in a scientific manner. Just by doing it brings systematic traders a great advantage. The most important point that discretionary traders can not realize is that if the strategy has not worked well in the past it is not wise to trade it in the future. Many strategies which non system traders trade with blind faith, when back tested do not make money.

______________

StocksandSignals.com - Stock Trading System
http://www.stocksandsignals.com/

.