Robust Trading Systems: TOPS COLA

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A robust trading system is one that can withstand a variety of market conditions across many markets and time frames. A robust system is not overly sensitive to the actual values of the parameters it uses. It is not likely to be the worst or best performer, when traded over a “long” time (perhaps 2 years or more). Such a system is usually a trend-following system, which cuts losses immediately and lets profits run. This philosophy, called TOPS COLA, merely says “take our profits slowly” and “cut off losses at once.”

Two examples of robust systems are a moving-average cross-over system and a price-range breakout system. Both systems are well known, and are widely traded in some form or another. The trades from these trading systems typically last more than 20 days. Hence I classify them as intermediate-term systems. They are trend-following in nature, in that they make money in trending markets and lose money in non trending markets. The typical system has a winning record of 35 to 45 percent, with an average trade of more than $200. I will discuss these systems in detail later.
The key feature to note is that, when systematically implemented over a “long” time and over many markets, robust systems tend to be, on the whole, profitable. If executed correctly, they guarantee entry in the direction of the intermediate trend, cut off losses quickly, and let profits run. Countless variations of these systems exist, and trend-following systems seem to account for a large percentage of professionally managed accounts.

Robust trading systems do not make many assumptions about market behavior, have relatively few variables or parameters, and do not change their parameters in response to market action. There is no sharp drop in performance due to small changes in the values of system variables. Such systems are worthy of consideration in most portfolios, and are reasonably reliable. In addition, they are easy to implement.

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