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Gentlemen:
Listen to what Robert is telling you. His observations are dead-on. Robert
has raised two key issues that arise with "system trading":
(1) The problem of price shocks. (Do not think that you can avoid them or
that you know when they are coming. Price shocks are one of the fundamental
reasons that systems do not survive long term. One bad shock can take away
many months (even years) of system profits. Ever get caught in on the wrong
side of a locked limit move? How do you think you will feel about your
system when you see months of work go up in smoke?)
(2) The problem of automation. (When we backtest, we look at every trade.
We act as though some robot would have been trading our account and would
have taken all of the trades, just as they are posted in our testing. But,
in the real world, things are different! We decide for various reasons not
to trade at certain times. This may be because our great-uncle is getting
married for the 8th time, because our dog is at the vet, or for any of a
host of reasons. The point is this: If you do not take every trade, just
as a robot would do, you may miss the trade which, in the long run, is the
one which makes your system profitable. How will you feel about system
trading if you have a bit of a losing streak, decide to take some time off,
then, while you're relaxing on the beach, miss the trade (which your system
calls perfectly) which would have turned it all around.)
To Robert's list of key system trading issues, I will add a third:
(3) Real-time data problems. (I am convinced that there is a huge
discrepancy between historical data which you might purchase and the data
which appeared to traders over their real-time feeds at the time the
historical data was supposedly captured. Those historical charts you're
looking at... they didn't look that way to traders at the time.)
The Omega Man
----- Original Message -----
From: Robert W Cummings <robert.cummings@xxxxxxxxxxxxxxxx>
To: Andrew Dykes <koad@xxxxxxxxxx>
Cc: <CRLeBeau@xxxxxxx>; <editorial@xxxxxxxxxxxxx>; <omega-list@xxxxxxxxxx>
Sent: Sunday, July 25, 1999 9:07 AM
Subject: Re: Price shocks and money management
>
> I agree you can't call it a system if personal discretion is used. If you
> use historical results then to repeat those results you must take every
> trade no excuses. No crashes, no medical reasons nothing should prevent
you
> from taking every trade. Your example about a diet is very good example
and
> the real reason to have a system. I don't have a system I use price
> patterns and indicators to trade using my discretion. Two reason for that
> one I can't program well enough and to I use fundamentals in my trading
> decisions. What ever a trader does to trade is okay it's his money. The
> term SYSTEM means automation absent human decisions all the time and any
> time. The rest of the examples here need a new definition like semi-system
> trading.
>
> Robert
>
>
>
>
> >Surely if a system trader stands aside from the market on all of the
above
> >occasions, he no longer has a system. I see my choices as taking my
signal
> >and risking 1% which on a report day may be a bit larger, which I can
> >handle. If I choose not to trade and miss out on a potentially large
move,
> >what then? What if it turns out to be the trade of the year? I find
nothing
> >more destabilising than missing a winning trade. It's a bit like making
that
> >one exception to a diet, very habit forming.
> >
> >I feel if you are worried about volatility on these days you are probably
> >trading way too large to begin with.
> >
> >Andrew D
> >
> >
> >
> >
> >
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