Trading Systems

[Ingot54 13]

TRADING SYSTEMS

 

Before posting any trading systems here, I’ll show you how to construct your own system. Then you will be able to judge the suitability or otherwise, of specific systems for your own purposes.

 

I need to remind you from the outset, that trading success relies less on the system used than on the skills of the user. And success does not depend on the number of indicators used, or on how mechanical or discretionary the system might be. And to pop the bubble of those who believe that getting a great entry is the best way to succeed, it should be noted that no profits are made until the trade is closed.

 

First let’s look at the kinds of trading systems:

 

1) Mechanical Systems

2) Discretionary Systems

3) Proprietary Systems

4) Black/Grey Box Systems

5) EA’s and Robot Systems

These are self-explanatory really, but I’ll quickly run through them to explain my own understanding of them

 

MECHANICAL SYSTEMS:

 

These are the simplest of all – If “A” occurs then the trader does “B”.

 

It can be as simple as price crossing a specific moving average; or the crossing of two specific moving averages; or price crossing a trend-line. The process can become a little busier when other conditions are introduced as filters.

 

These may include using indicators such as MACD, Stochastic, RSI, CCI, PSAR, Bollinger Bands, Price Envelopes and/or any number of specially constructed indicators.

 

And for those who are taking their trading to higher technical levels, support and resistance, or supply and demand levels can be established. Signals are generated around a break-out or breach of these levels. This is where Mechanical Systems begin to overlap with Discretionary Systems. Sometimes the signal needs to be validated by the trigger signal occurring within the context of the “set-up filter” conditions occurring first.

 

DISCRETIONARY SYSTEMS:

 

These are usually based on Mechanical Setups, but the experience of the trader kicks in, and he exercises CHOICE about whether to take the signal, or ignore it or wait for further confirmation: eg what is the price of Gold or Oil doing; or if trading the AUDUSD, he may wish to check the chart of the EURUSD first. Some traders simply look at the chart and make their trading decision based on their experience.

 

Very few systems are “pure” – they usually involve a combination of everything the trader has learned. This can also involve the use of Candle-sticks or OHLC bars, or even more exotic kinds of charting – Point-and-Figure, Heiken Ashi, Range Bars and so on. There are as many discretionary approaches as there are traders, I suspect.

 

PROPRIETARY SYSTEMS:

 

These systems are used by Institutions and Banks and so on, and are well-kept secrets. There are of course claims that “this is the system used by the XXX bank”, but such claims are baseless generally. The truth is that such large institutions normally base their trading on supply and demand, and have certain price targets they are trying to achieve.

 

It is true that they may be using more sophisticated software than the general retail trader, but this neither gives them an advantage over the retail trader, nor any better guarantee of success. They may have their own private indicators, but it is unlikely that this renders any better advantage. In any situation, success or otherwise will be determined by the willingness of the trader to submit to the discipline of following specific and immutable guidelines.

 

BLACK BOX SYSTEMS:

 

These are best described as private indicators which are sold with the promise that they “made $xxx or zz pips/trade” over a period of time, and the exact formula and settings for the indicator are hidden “inside” the software. Unless the trader knows how to “crack the code” the setup remains a mystery. Traders purchasing these are taking on trust that the system will continue to perform in the future as well as it supposedly did in the past. GREY BOX systems usually have some user-adjustable parameters, and may or may not be used in conjunction with other setups, involving trader discretion.

 

EA’s AND ROBOTS: (Expert Advisors and Automatic Trading Software)

 

These are becoming more popular and there are even World Robot Trading Competitions these days, so that inventors can test their Robots and EA’s under live competition conditions. So far the success rate of these has been disappointing, but there are a few that have done OK. I suspect that the best ones have been locked up under contract to large institutions … and why not? Still, a very great effort goes into finding that elusive tweak in software that will deliver trading success … while you sleep!

 

So … we have covered the main kinds of trading systems … except for the retail system market! I would just warn readers to be very careful when considering paying for a retail trading system of the kind you find advertised by spam and on the Internet. These have been around for years now, and are always mutating, evolving … and ultimately failing and disappearing!

 

In any event, there are forums that deal with these now. In your “search” box, type in the name of the system you are interested in, and add the word “Scam”. This can tell you something of the experiences of others. But beware – the marketers are even ahead of you on this now, and set up sites to sell the product under the guise of refuting the scam claims! Do some research – ask around – join a forum – or simply devise YOUR OWN system. Chances are that you will trade much more successfully, because you will understand it, and you will “own” it yourself.

 

In the next entry, we will get on with system construction … to be continued.

 

_________________________ _________________

 

Posted in my Blog: http://forexapplepie.com/

[Ingot54 13]

  Ingot54 said:

TRADING SYSTEMS

 

I need to remind you from the outset, that trading success relies less on the system used than on the skills of the user. And to pop the bubble of those who believe that getting a great entry is the best way to succeed, it should be noted that no profits are made until the trade is closed.

 

BLACK BOX SYSTEMS:

 

Traders purchasing these are taking on trust that the system will continue to perform in the future as well as it supposedly did in the past.

 

EA’s AND ROBOTS: (Expert Advisors and Automatic Trading Software)

 

These are becoming more popular and there are even World Robot Trading Competitions these days, so that inventors can test their Robots and EA’s under live competition conditions. So far the success rate of these has been disappointing, but there are a few that have done OK. I suspect that the best ones have been locked up under contract to large institutions … and why not? Still, a very great effort goes into finding that elusive tweak in software that will deliver trading success … while you sleep!

 

I should mention that 100% of Robots disappear.

 

Some fail and are discarded, or become less profitable than when released because of curve-fitted software or curve-fitted results.

 

There are some Robots that do not suffer this fate, but they still disappear ... they are purchased by Institutions and Banks because of their reliability, and the public never gets to see them in the light of day.

 

For further confirmation of this, Google: Forex world cup contest or Robbins World Cup.

 

The interviews with the three winners are well worth the time. The most interesting comment was that these men develop their own strategies, and no one else has them. Period. Their edge belongs to them - these things are NOT shared.

 

The winner will gets $100,000 prize, and the runners up will share the remaining $50,000 prizemoney. But the winner may be losing more than the $100,000 he wins, as he loses all rights to marketing his robot for 6 months.

 

It seems to be the way of the future, but I am wondering if the future will still involve the small player? Those with the money can afford to lock up the best software, and the small trader will still need to find his edge by the seat of his pants, one would think - very much like it always has been.