Wednesday, May 12, 2010

My View On Systematic Trading

     
I received an email from "Blurrturtle" that asked "What are your rules for system trading?"

When I first got this email, I was thinking whether this is a trick question.  System's trading by definition is already trading with a set of rules.  So naturally I was wondering if "Blurrturtle" wanted the set of rules in my trading system or just basic guideline on systematic trading.  I believe he/she meant the second part.

Novice trader may be wondering, why are there so many rules to systematic trading?  First you have a set of rules that govern what, where, when and how you trade, then you have another set of rules to make sure that you follow the previous set of rules!  I'll try to explain why in my future postings.

Here's my simple set of rules for systematic traders:
1. Do proper back-testing and optimization.  Make sure you know your systems performance well then ask yourself if you are comfortable with the max drawdown (usually it will happend sooner and bigger than you think) and how long it takes to recover? If not, don't trade the system or find another one.
2. Make sure you have sufficient startup capital (identified via your back-testing) before start trading.
3. Have in place a method to tell you that you should stop trading the system when it is no longer working.
4. Just strictly follow your system (without fighting with yourself and the market) until 3 happens.  This is usually the hardest part.

I hope that answers the question posted by "Blurrturtle".  Cheers & Happy trading.