Confession of system trader– Review of mistake
It is a tough process to developed a efficient trading system. It is tedious to run through back testing year by year of historical data. However, I think it is the toughest job to follow your system with defined rules. Human like and good in defining rules. We know how important it is to have rules to get our life organized and avoiding unnecessary risk or even damage. The problem is, we always find it hard to follow the rules Trading is no different from real life.
Let’s take a look of an example. System generated a BUY signal for SIMSCI on 29/07/2005 after market closed at 276.9. The system was telling me put in a buy order at opening price + 2.2. So, the buy stop order should be 280.2. Well, now the evil is struggling. “From 276.9 to 280.2, it is 3.3 away. Normal trading range of SIMSCI is 2.5, how is it going to fill my buy order? How about I buy in at open straight and do a day trading ,sell at any point higher if it is lower than 280.2. I might got in some fast cash! That sounds cool, I need to develop a sub system within my system” The result of follow the evil’s suggestion instead of following predetermined rules is destructive. Yes, 280.2 did not get filled, and the sub system bought in some contracts. At opening, follow the fluctuation of price, and guess what, I ended up with a small loss. The loss is small, it did not cause any damage, but it is totally avoidable. Building a ‘Sub system’ within a system in this way is a fool’s game.
Why did the system issue a buy order at 280.2 which is out of normal daily trading range? What is the characteristics of the system? After thinking of this , I realized the mistakes I have made. I have set in parameters and checking to confirm market moves in the strength and the odds are with us to go higher if the setup price is triggered. These rules are tested. If market fails the reach the point, it is simply telling me, ‘Hey,now it is not the time to get myself in the market’. What I should really do is ,staying aside.
Market will open tomorrow, no point betting your hard earned cash without knowing that odds are actually not with you.
Have a profitable day,
Swin
