Brett at Traderfeed posted recently about A Few Trading Psychology Observations he had made, in the form of eleven bullet points. Here’s a response, also in the form of eleven bullet points, from the POV of an intermediate- to longer-term mechanical systems trader.
* Almost all the model building done by a systems trader on an intermediate- to longer-term timeframe is aimed at understanding or figuring out market action â that allows the system trader to build better systems.
* Systems can be optimized to work in one market regime, with a signal or overlay allowing the system to switch when regimes change, or the systems can be optimized to work “overall” regardless of the particular regime in place at the moment. The significant downtime that systems traders have (since they’re not watching the market every minute) allows them to step back and take a look at longer-term market patterns.
* Sound planning, i.e., BACKTESTING, is the basis on which the systems trader approaches the market. Not only are the plans based on sound market analysis, the plans are EASY TO STICK TO, because the system trader has REASONED CONFIDENCE in its backtesting.
* Most of a systems trader’s time is spent developing, i.e., “practicing.” The actual trading takes up very little of the system trader’s time.
* Building systems, and trading them, is the antithesis of a “passion for trading,” and epitomizes a “passion for markets.” What else can be said about a process where 90% (or more) of the time is spent developing, and 10% (or less) is spent trading?
* Trading a system is about being “right” in a STATISTICAL SENSE. It matters not to the system trader if they’re “right” THIS TIME; they just need to be “right” enough to meet their pre-set absolute benchmarks.
* To the system trader, views on the market are somewhat academic; modification of trading stance is based on system output, and modifications of systems are based on evidence, not feeling.
* It’s easy to tweak a system to be more aggressive with fewer trades (or less aggressive with more trades). The beauty of backtesting is that allows the system trader to decide which choice is more likely to meet their benchmarks.
* Systems are about ideas, not about people.
* Systems focus on responding to what IS happening in the markets. Systems are positive and inductive/statistical ways of looking at market action, as opposed to many macroeconomic pundits’ normative and deductive ways of examining the markets.
* System development and testing never stops. It usually is carried out when markets are closed, and the time spent actually trading is miniscule compared to the time spent thinking about the market, the systems, the backtests, etc.
Trading mechanical systems isn’t for everybody, that’s true, but I personally have found it to be most definitely for me.
5 Comments
Good comments Bill. Mechanical strategies definitely suit me - I find trading to be extremely boring.
My only comment is that the best practionaires of mechanical systems recognize the randomness and unpredictability of market prices. Predictions are for losers. A good blackjack card counter doesn’t make predictions, but bets with the odds and uses good money management practices to beat the house.
Research, testing, and discipline.
If prices were random and unpredictable, no systems would work. That systems DO work is proof that prices are neither random, nor unpredictable.
I believe the key is remembrance that said predictions are of the STATISTICAL sense; it matters not what happens to any particular trade, but what happens to the GROUP of trades being made. I don’t predict that any one particular stock or ETF I buy will go up, I predict that, as a group, the stocks or ETFs I buy will dramatically outperform the market over time.
Your blackjack player IS making predictions — in the STATISTICAL sense.
Bill,
I think we’re dancing around the meaning of the word “predict”. I don’t believe anyone can “predict” future market behavior, the result of a single trade, or even the outcome of a series of trades (or system). I do believe it is possible to increase the likelihood of positive outcomes, especially over long periods of time by exploiting anomalies. My card-counter analogy goes like this: He/she cannot predict the outcome of the next hand, or even the outcome of the next series of hands. However, the card counter gains a statistical edge over many many hands. If the card counter uses good money management techniques, they will undoubtable beat the house, however, they’re not really ‘predicting’ outcomes.
I also don’t believe the market is random, however, I do believe there is a good deal of ‘randomness’ in the market, especially over the short term. All market ‘trend’ and experience periods of extreme deviation from the mean, but identifying those trends and extremes isn’t exactly easy.
Even the best timing and mechanical selection systems will experience periods of poor performance - sometimes very long periods of underperformance. I believe system diversification is a good way to deal with this.
Bill,
I found your blog at Brett Steenbargers site.
I’ve been a full-time discretionary trader for 10 years. I’m looking for direction on how to find and/or work with someone to develop system trading strategies. Any advice or direction would be appreciated.
Thanks for your insights.
Bob
Hi Bob, good to see you here!
Click on the “Archives” link at the top right of this page (in the “Sitemap” box), and scroll through the “Archives by Category” for “Specific Discussions of Trading Systems” and “Broad Discussions of Trading Strategies.”
I think you’ll really enjoy the TRPITS series.
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[…] indicator of a trader’s prospective success.” From a system trader’s perspective, Bill Rempel added “System development and testing never […]
[…] more robust if it is tailored to a specific market condition?” This is response to a point in Blogging Cross-Talk: Psychology Observations where I said, Systems can be optimized to work in one market regime, with a signal or overlay […]