Why Different Trading Systems Matter –
As an introduction to the subject, I want to point out that there are different approaches to Systems development that range from super-computerized to having subjective trading rules that the trader applies in the decision-making process. The challenge is to apply the right system within the framework of a trading Method you’ve identified for a section of your Wealth Building Plan. It’s important to quantify some guidelines for the Systems you’ll be using, so you understand how to manage any Method that’s part of your Plan. You’ll be looking at the Method you need, but knowing the underlying System your Trading Partners have developed helps to evaluate its usefulness.
A Method is the combination of Style and Vehicle.
A System is developed to fulfill the needs of the Method.
Having a disciplined set of rules as a guide is the hallmark of a good system. Having a management process to fit the underlying parameters to changing market conditions is the secret to having a successful System. Remember, Systems come and go and are only as good as the developers make them, along with how well the Systems have been tuned to the market. As you execute your Wealth Building Plan, your Trading Partners will develop the Systems to run the Method being used, and it’s your choice which System best fits your needs, experience level, and personality. The extent of your involvement in the Systems being used is to manage the output for the appropriate section of your Plan within your chosen Methods.
Artificial Intelligence (AI) is being developed more and more to be used in Trading Systems to improve results and consistency. One of the great advantages of AI is that it will allow the System to adjust to market conditions on a real time basis, eliminating the need to second-guess the market. As AI makes inroads into the Systems used by the retail wealth builder, the advantages of using AI based Systems will multiply and, I think, will produce the next major step in allowing individuals to be able to take control of their financial future with more certainty. In all my research, I will be emphasizing AI in the systems we’ll be using for your Wealth Building Plans.
Trading System Categories
Of all the trading systems out there in the marketplace, I’ve been able to define the best of them as belonging to two broad categories within the dominant Styles of Trading (Intraday Trading, Swing Trading, and Portfolio Management) that I like to call:
- Programmed Trading – A proprietary computer program built based on technical analysis indicators and other assumptions to produce a self-contained system that automatically generates signals to be followed by the trader. You generally buy and learn the program with education and support from the supplier and trade based on the rules established within the program. Here’s where AI based Systems will provide the next generation of programs to make the individual wealth builder’s life a lot more productive. Currently, the field can include programs you use to build your own trading system and extensive, professionally built systems traders implement with no individual input. Not to be confused with “Program Trading”, which refers to institutional programs initiating trades based on algorithms created to take advantage of specific market conditions, like the much-touted High Frequency Trading (HFT) programs.
- Technical Trading – Trading rules are established through education and training and require the trader to manage the rules independently. A variety of techniques are formed with the use of technical indicators, multiple time-frame analysis, market analysis, and other inputs to create a System that fits the market being traded. I include Intraday Trading “on price action alone” in this category, since the technique is based on chart patterns and knowledge of what those chart patterns mean. Technical Trading is the most common approach and requires a good knowledge of the industry and development of parameters relating to the market being traded. For an example of what indicators could be used and the related charts, take a look at my Chart Setup for All Seasons. It all boils down to developing rules to follow when trading, and the success or failure of any system depends on the one developing the rules. Needless to say, this opens up a can of worms, and developing your own system or finding a system that actually works becomes a huge challenge.
So, we’re not looking for “systems”, we’re looking for good Methods and skilled management to make any particular system work. Systems matter only to the extent that they are the tools to enhance the Method and produce the results that are expected.
The Method is the purpose, and the System is the execution mechanism.
The whole field of system development is so large, with so many players, that trying to quantify any reasonable approach to deciding on what to follow becomes a lifetime of research. The problem you run into in the marketplace is not knowing what works and what doesn’t, and, if you try everything to find out, you’ll spend a lot of money and time and still end up not achieving much success. Besides, that is not the job of the individual wealth builder. Happily, I have found a variety of talented people that have devoted their lives to certain trading Methods and have developed Systems that work.
I want to emphasize that we’re not looking for trading systems, per se, as much as for the experts dedicated to their Method of trading that fit into your overall Plan.
Don’t get caught up in the hype about any particular system changing your life and making you instantly into that consistent trader. Look for organizations that have been built by dedicated experts with a history of accomplishment and work with them. They have the pulse of the market and the experience to make their systems work.
Finding those dedicated experts, Your Trading Partners, to make your Wealth Building Plan work is a primary mission of The Diversified Trader.
If you’ve been involved in the trading and investing arena for any length of time, you know how varied and confusing the marketplace really is. With all the different Systems and Methods vying for your attention, there’s no effective way to determine what’s good and what’s bad by listening to the promotions. The failure rate among wealth builders is very high and is in part based on this phenomenon of not knowing which way to turn.
It’s very hard to know how any system will work. The key to winning isn’t in the system as much as it is in the execution of the Method. Too many systems are based on back-test results and curve fitted to the historical data to make the test look good and then touted as being a viable trading system.
My caution is to never take a System at face value, and only evaluate Systems in the context of proven techniques and the people behind the programs – your Wealth Building Plan will thank you.
Studying the indicators and different chart configurations outlined in Chart Setup for All Seasons will get you started understanding technical analysis or improve what you’re doing now.
To the Technical Side of Life,
Your Research & Development Coordinator
If you’re not already in the loop, get a head start on navigating The Diversified Trader and finding the right path to taking control of your financial future by reading The Diversified Trader – An Overview.