What is System Trading?
System trading (also known as mechanical trading systems) is the deployment of a well-defined and very strict set of criteria for trading a futures market or individual stock--including entry and exit points. The trading criteria for a particular trading system can include all kinds of technical indicators, chart patterns, volume, open interest, and even fundamental factors. There are all kinds of trading systems available for sale, and even more trading systems that have been developed by individual traders, for their own use.
The key tenet of a trading system is that strict signals are given for market entry and exit points, based on the parameters of the system. Most trading systems are computer-program based, due to the complex nature of most of the trading parameters. Indeed, trading systems can be highly complex and have dozens of parameters plugged into the system. Or, a trading system can be as simple as a moving- average "crossover" method that provides buy and sell signals with each moving average crossover.
Advantages of System Trading
A major advantage of system trading is that it takes the human emotion factor out of a trade. By strictly adhering to criteria built into a trading system, a trader cannot be swayed by such emotions as fear or greed "in the heat of battle" during the trade. Many veteran trading professionals argue that the major downfall of futures traders is their own emotions and lack of trading discipline. A trading system attempts to control both emotions and trading discipline.
Trading systems can be "back-tested" by running the trading system program through many years of previous price data for one or many markets. A trader may discover that his particular trading system works best in T-bonds or best in grains. When doing back-testing, a trader can refine the trading system's parameters to get what he or she feels is the very best trading system, based on past price history, and for various markets. This is what trading system advertisers and marketers call "hypothetical" trading results.
For some traders who are also computer programming "wonks" anyway, much of the enjoyment of a trading system is derived from designing it, actually building it and testing it -- before it is ever actually put through the paces of real-time trading.
Disadvantages of System Trading
There are at least a few significant disadvantages of the "system trading" methodology. A major drawback is the potential for severe drawdowns in one's trading account. Since many trading systems have a trader in the market -- either long or short -- all the time, then unexpected big price moves can be devastating to a system trader who does not have a bigger trading account.
Another disadvantage is the propensity for marketers to "hype" a trading system as generating immense profits, based on "hypothetical" results. For example, a trading system may be advertised as generating 300% profits over the past five years, based on hypothetical back-testing. What the marketers and advertising don't tell you is that the drawdowns on a trading account may have been so severe that the vast majority of traders would have been wiped out before the market ever turned around.
While mechanical trading systems attempt to eliminate the potentially negative human emotion factor, they also eliminate the very important "trader intuition" and experience tools that can be extremely valuable. While computer trading programs are very powerful and take into account many, many variables (as many as the developer wants to add), there is no substitute for the power of the human brain and its flexibility.
For comparison, my "toolbox" approach to trading means that I may use any and all trading tools available to me in any given trading situation. I'll use different trading tools for different trading circumstances. To program a trading system to have such flexibility would be extremely difficult, if not impossible.
Finally, I do get many inquiries regarding the use of trading systems by individual traders. There is no single right answer regarding the viability of trading systems for individual traders. "Different strokes for different folks," as the saying goes. However, my universal response to those newer traders seeking out a trading system and who ask for my opinion on the matter is this: First, read some classic books on futures or stock trading tools and strategies. Learn and fully understand some of the basic trading tools and trading methods, which will likely be in some way incorporated into a trading system anyway.
Hati-hati dalam memilih saham, selalu recek dengan chart Anda, pilih yang cocok saja dan jangan lupa MM dipasang di Trading Plan serta Be Discipline.
Semoga bermanfaat.
ES
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