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Why You Need To Develop Your Own Trading System
By: Marquez Comelab
There are many trading systems and strategies out there. There are many free
ones printed in trading articles, journals, books and on trading-related
websites. You can buy them as software or you can subscribe to them
periodically.
Novice traders say they do not have the time, the aptitude, the talent nor the
brains to work out how to trade properly. They would rather purchase a program
or subscribe to a trading system for hundreds – or in some cases – thousands of
dollars. They say they do not have to do anything except be told what to buy,
when to buy and how much of it you need to buy. Some ask me if this strategy or
approach is advisable for trading the financial markets. To answer this
question, I am then forced to consider the advantages and disadvantages of using
such an approach to trading.
There are reasons why a trader would use a system or strategy that someone else
developed and tested:
1. It is easy. A novice trader does not need to study how the market works and
how he interacts with that market. He does not need to educate himself: he does
not need to bother with books and seminars. He does not need to test the system,
since the seller has already done that for him and reported promising
hypothetical or actual results.
2. A novice trader hopes to get a trading system at a ‘bargain’ price… sometimes
even for free.
Hazards of trading a system or strategy developed and tested by someone else are
the following:
1. Faulty Systems
There are many faulty systems out there. They may be faulty because their
assumptions and their mechanisms may no longer be true, accurate or valid. As a
novice trader, how can you distinguish between the good systems and the bad
systems if you don’t know how trading systems are built?
2. Discipline and confidence
All systems have drawdown periods. Some good systems may not make money for six
months or an entire year. Even if it was a good system, can you continue to
follow it even if it gives you a loss after a loss after a loss? How can you
follow it if you do not have confidence in it? How can you be confident if you
do not know the ins and outs of the system and if you have not tested it
yourself?
I do not believe that people would blindly follow a system even if they were
told that it would bring them riches. I can give someone a trading system, I can
supply him with exceptional hypothetical or actual results and still, he would
not be able to follow it.
I remember giving my dad a fully-mechanical trading system I developed. I told
him a few simple rules and I told him not to question them. All he had to do was
to follow them. We both traded it for two months, I grew my small account by
roughly 50% (it happened to be a good two months), but he was losing. He
wondered why. I asked to see his trading records. When I looked at his trading
records, I found that he kept disobeying the rules. When I asked him why he
disobeyed them, he wanted to improve the results after it had a couple of losing
trades. He was trying to improve the results. According to him, the system asked
him to do what he thought was not right during certain market conditions, so he
did not follow it. I found simple errors too, including opening trades at market
price instead of waiting for buy and sell stop orders at support and resistance
levels to get triggered. I also asked that he executes trades at the close, but
oftentimes he traded two hours before or after the close at his discretion.
There were many more rules he breached. He is a smart man: a former civil
engineer and now a manager for a big organisation. Why could he not follow
instructions? It is simple. He did not know the reasons behind the rules I had
set and so he did not appreciate them. His money was on the line and after a
series of losses, he lost faith in the system easier than I did because he did
not develop and test it himself.
To overcome the hazards above, I see no way except for a trader to learn how to
develop his own trading methodology. This is the only way a trader can know if a
particular system or strategy is good or not.
Once a trader learns how to develop systems and strategies, he can then be
better equipped to test them as well. By this point he might even find that he
is better off using the system he created, because it becomes increasingly
difficult to find another system more suited to his profit objectives while
operating within his risk tolerance levels. It is likely that once he develops
this level of competence, he will simply acquire other systems only to dissect
them, grab the parts he likes and add them to his own system. To me, the irony
is that for a trader to know which system to purchase, he must first learn how
to create a system. And after knowing how to create a system, he will no longer
have the need to buy one.
In conclusion then, I would have to say that if you are not inclined to learn
how to develop your own trading methodology, then perhaps you should consider
giving your money for someone else to invest. Give it to someone who is trading
a system that he developed and tested himself because he is more likely to have
the confidence and courage to follow his own set of rules.
About the Author:
Marquez Comelab is the author of the book titled: The Part-Time Currency Trader,
a book for novice and intermediate traders. It shows how anybody can develop
their own trading methodology to trade the currency (forex) market. See:
www.marquezcomelab.com. |
