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Trading Systems
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Trading Systems

  #1 (permalink)
Trading Apprentice
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Trading Systems

Everyone has a system it has become a buzz word. Everyone says their system is the best and everyone has a promise of pots of gold at the end of the rainbow. I am not saying that these systems don't work but what I am saying is that of they do work you need to work out why they work and why the other ones dont.
This is a question that has been on my mind for some time and I think I have arrived at conclusion. The system is in actually fact not that important at all. What is important is the principles behind the system and the better the principles are the better the system will be.

There are many great traders making lots of money and many bad traders losing lots of money and they all use different systems to make or lose their money. Conclusion- the principles you follow are far more important than the system you use to implement them. If you implement bad principles with a good system your probably still going to lose where as if you implement good principles with a bad system ( I am not sure if there is such a thing but that's for an other day) you will still make money.

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  #2 (permalink)
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  #3 (permalink)
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You need good principles behind a system. But you also need a good system to execute what you believe about the market. Good principles with bad execution of those principles can cause you to lose. Good principles alone won't make you profitable.

"The day I became a winning trader was the day it became boring. Daily losses no longer bother me and daily wins no longer excited me. Took years of pain and busting a few accounts before finally got my mind right. I survived the darkness within and now just chillax and let my black box do the work."

Last edited by liquidcci; July 23rd, 2012 at 12:26 PM.
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  #4 (permalink)
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If one defines a "trading system" as a methodology about how to profit from market movement, then I suppose everyone has a "system."

But if one defines a system as having a written plan, rules to follow, and signals that are generated and taken, then not only do you not need a system, but having one is probably the reason for the lack of profitability.

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  #5 (permalink)
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kerrmac View Post
If you implement bad principles with a good system your probably still going to lose where as if you implement good principles with a bad system ( I am not sure if there is such a thing but that's for an other day) you will still make money.

There is such a thing as implementing good principles with a bad system, I know this as the first one I developed when I got into futures trading was not a good system. It was a system that was nearly always taking counter-trend trades, had a low win rate %, and would frequently have strings of losing trades however I traded it with those good principles you refer to. In this case it was by always using a stop, only risking a small percentage of trading capital, and letting the winners run. I still managed to make a profit with it (albeit not much), I'm now using a different system which is much better, a much higher positive expectancy. The marriage of good principles, a good system and accurate execution should create decent profits.

EDIT - I've just seen that you're based in Glasgow - I used to stay in Cecil Street near Glasgow Uni. I think you're the first I've seen based in the same area as me. How's your trading going, have you set up a trading journal on here? If not I recommend you do it, it's been immensely helpful to me.

"The primary thing required to obtain what you want from life, is simply the will to pursue it, and the faith to believe it is possible." - Author Unknown

"The ability to maintain discipline and stick to the rules is the hallmark of the experienced successful trader" - Curtis Faith

Last edited by PositiveDeviant; July 29th, 2012 at 11:28 AM.
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  #6 (permalink)
Fortitudo et Honor
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This is an age old debate and here are my thoughts....

There are several reasons why traders adopt "systems" which can be anything from a broad philosophy of how to frame, assess and then approach the markets to a very specific set of "rules" which can be quantified.

Some traders use "rules based trading" for the handrails and discipline it provides. Some traders use rules based trading because it's intellectually easier, simpler (at least in the intial concept).

I happen to use rules based trading because I feel that anything less is difficult to impossible to validate.

If you have no concrete rules, no paradigm that can be communicated to others, then essentially, you have really no way of knowing if you're just THAT good (assuming you're successful) or you're just lucky.

Reversely, if you're not achieving success, and you don't have a rules based approach, you have no way of knowing if you're just "unlucky" or if your approach is not sound or long term profitable.

As far as "principles" go, I wouldn't hang my hat on such nebulous concepts. At best, "principles" tend to be fairly lofty and broad and make for nice webinar presentations and cocktail discussions....but have very little "rubber meets the road" applicability.

Additionally, the only true incontrovertible I've ever found in trading is that there's really no such thing as an incontrovertible. For every trader that swears you MUST do something, there's no doubt, someone somewhere that made a fortune never doing that. For every trader that swears you should NEVER do something, there's most likely someone who made a fortune doing ONLY that very thing.

I think a graphic showing the sets and subsets of trader classifications and groups would be helpful. Not every "rules based" trader is an algo guy. Just because you employ a set of rules, doesn't mean you have to automate.

"Discretionary" also doesn't always equate into someone who has no rules.

The approach by employing a "system" not only allows you to validate your performance results, it also helps you to employ a whole host of techniques and analysis in order to better identify the strengths and weaknesses of your methodology. If you have no rules, it's impossible to determine whether or not you're truly set up for long term success and just as impossible to identify and improve certain portions/conditions of your approach.

Having spoken about the lack of incontrovertibles, and the low utility/applications of "principles" the last thing I'll add is that I think the vast majority of unsuccessful traders take too much risk (or don't even understand what that is, that they're taking too much risk for the rewards sought and really have no formal or concrete grasp of risk management and how it applies to trading). All of business with respect to anything that is non-human is simply risk management. You seek to accomplish something in the future and you take on a certain amount of risk in order to achieve that goal. Sometimes the risk is acceptible, sometimes it is not.

If you do not have a "system" or approach, (or any defined rules) I think it's nearly impossible to implement ANY sort of true risk analysis or risk management.

In the end, "it's better to be lucky than good" usually only works for weekend trips to Vegas, Lottery winners, gameshow contestants, etc. In trading, I'd rather be good than lucky. And the lack of any rules or a "system" will never be able to reveal whether or not I'm just on an extended lucky streak (with the perfect storm of the right market conditions that fit my particular discretion) or I'm actually employing sound techniques, risk management, etc.


"A dumb man never learns. A smart man learns from his own failure and success. But a wise man learns from the failure and success of others."
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  #7 (permalink)
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Reminds me of the time I had no idea what a system was. My advice would be

a) get as much experience as possible trading what you know (I traded one instrument 24/5 for 2 years) to learn from that experience (may take a few years, paper preferably or cash, until you run out of cash).
b) once you've identified what your weaknesses are (if any) start window shopping for systems. Do the demos to judge whether they appeal but don't spend cash on tuition--that will come later.
c) buy the system that most closely approximates your trading style, appeals to your weakness and still appeals--same way you choose a significant other (serious business, don't fool yourself about that--I hear divorce is costly)
d) trade paper until you get the gist of the system (or if cautious, until you're consistently profitable over your chosen time frame).
e) modify the system as appropriate to your profit expectations.

ETA: successful trading turns out to be one of the most boring careers I could imagine. If you want thrills or money take up wing diving (thinking about it) or marry rich.

Finally figured out why traders write books: not because they failed as traders or want to support the industry (it's a legitimate career) eventually they they just get bored, start thinking about their legacy.

Last edited by bnichols; August 4th, 2012 at 10:45 PM.
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