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Trading System
The definition of a Trading System is: a group of rules through which historical data series can be interpreted and from which it is possible to extract buy or sell signals. These rules can be in a traders mind, written on a piece of paper or part of a computer programme – there is no difference. Whoever comes to rely on a Trading System must decide to temporarily suspend subjective and emotional evaluations from the decision process.
In a Trading System project, the start point is the assumption that market movements are not completely casual. The supposition is that within a historical data series, there exist regularities of some nature, that can be identified and used to produce a profit. Therefore, in past prices there is a measure or indication of how prices will behave in the future or that, at least, part of the behaviour of prices in the future can be deduced from historical data.
Those who share this vision of the markets, believe that movements within prices in historical data influence future trends. Designing a system means find regularity or a group of formalised regularities which are useful in being able to forecast future movements in a financial instrument, in a statistically correct manner.
The trader however remains the only person responsible for the choice in the medium term, and decides on which instrument to apply the Trading System and how much capital to invest in the various Trading System.
The advantages in using a Trading System:
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The emotional component is removed, which otherwise would lead to illogical trading decisions or would ignore the rules that have been defined and are considered correct. A computer has no emotions. It simply works out and communicates the operational suggestions based on the input it is given. Entry and exit to markets are coherent and based only on logical criteria.
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Stress caused by negative trades is removed. The system was wrong, not the person, which takes away the individuals’ responsibility, reducing the psychological pressure generally linked to taking high risk trading decisions.
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The tactics to be adopted and strategic decisions taken can be tested against the past, so that the trader can see how their portfolio would have behaved in specific market phases. This allows them to take into account a trading profiles’ risk, by adapting the strategy to meet the desired objectives against the capital invested.
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