A good trading system satisfies your individuality. Fortunately, the quickest way to find everyone is through the trial process and terror. Any system-checking software on a fast computer will help you to produce a large number of thousands of pink scenarios. Markets unmistakably show any shortcomings in your project. They will push you to determine what you truly believe. Ultimately, if you survive, you will discover your trade faith. Markets will lead you to the system that best suits you.
This book shows you how to create, verify, and implement systems that suit your personality. You will develop not only trading systems, but also a system for trading. This approach will increase the difference (disagreement) that you will survive and prosper in the markets.
These book centers are solely on the creative design of the system, complete testing, sensible money management, prudent risk management, and careful attention to implementation. These factors distinguish this book from others.
DEVELOPMENT AND IMPLEMENTATION OF TRADING SYSTEMS
On the subject. An attractive feature is that most of the material is original or new. This article is divided into two halves of four chapters each. The first part is devoted to the design of trading systems. The second half discusses how to implement trade systems. The first half covers the following topics:
- Principles of designing a trading system that covers six cardinal rules
- Basics of the project system, which represents the ten main problems of the project
- Development of new trading systems, which describes in detail seven new systems
- Development of trading system variations, which discusses eight variations of known ideas
Once you have read the first half, you will be eager to explore questions about system implementation. The second half of the book is organized as follows:
- Equity curve analysis, which explores what influences equity curve smoothness
- Ideas for money management, which is the starting point for risk control
- Data scrambling, which offers all the synthetic data you will ever need
- A system for trading, which presents solutions to practical problems
After reading this volume, you should be able to take your ideas and convert them into useful trading systems. This book develops deterministic trading systems, which means that all the rules can be explicitly evaluated. The book does not discuss trading systems based on expert systems, neural networks, or fuzzy logic for two simple but important reasons: (1) More users understand and easily implement deterministic systems than any other type of system. (2) The software for testing deterministic systems is widely available at an economical price. Put the two together, and this book becomes immediately accessible to a large audience.
The Usual Disclaimer
Throughout the book, a number of trading systems are explored as examples of the art of designing and testing trading systems. This is not a recommendation that you trade these systems. I do not claim that these systems will be profitable in the future, nor that profits or losses will be similar to those shown in the calculations. In fact, there is no guarantee that these calculations are defect free. I urge you to review the section in chapter 3 called a reality check. That section points out the inherent limitations of developing systems with the benefit of hindsight. You should use the examples in this book as an inspiration to develop your own trading systems. Do not forget that there is risk of loss in futures trading.
What Is a Trading System?
A trading system is a set of rules that defines conditions required to initiate and exit a trade. Usually, most trading systems have many parts, such as entry, exit, risk control, and money management rules.
The rules of a trading system can be implicit or explicit, simple or complex. A system can be as simple as “buy sweaters in summer,” or “buy when she sells.” By definition, the system must be feasible. Ideally, the system accounts for “all” trading issues, from signal generation, to order placement, to risk control. A good way to visualize effective system design is to stipulate that someone who is not a trader must be able to implement the system.
In practice, every trader uses a system. For most traders, a system could really be many systems. It could be discretionary, partly discretionary, or folly mechanical. The systems could use different types of data, such as 5-minute bars or weekly data. The systems may be neither consistent nor easy to test; the rules could have many exceptions. A system could have many variables and parameters. You can trade different combinations of parameters on the same market. You can trade different parameter sets on different markets. You can even trade the same parameter set on all markets.
It should be clear by now that there is no single universal trading system. Every trader adapts a “system” to his or her style of trading. However, it is possible to draw a distinction between a discretionary trader and a 100% mechanical system trader, as compared in the next section.