'The REAL Secret of Systems Trading' - Part 1
The lifestyle of the successful
trader is a good one
- Freedom to do whatever you wish
The independence that success brings is probably trading's most valued benefit.
But only a few traders manage to reach this enviable position. Most of those who attempt to succeed as traders don’t make it. That’s the nasty thing about reality – there always seems to be a catch.
Musicians and sportsmen must work hard to get to the top of the tree but they start out with natural abilities that give them an advantage over everybody else.
Success in trading is not like that. It is not a gift from above, possessed by only a predetermined few. Richard Dennis proved that in his great Turtle experiment - it is possible to teach successful trading and for the ordinary guy to become a winning trader.
But the popular belief has always been that the winning traders have closely guarded secrets that guarantee their success. In this way the privileged group who are ‘in the know’ manage to hog all the juicy profits.
This view is encouraged by unscrupulous people who offer ‘killer systems’ for sale. Their secret will make you very rich in a few days or weeks – no doubt about it – all you have to do is buy it from them.
O.K. it may seem like a lot of money to pay for a secret but what the heck? When you know that secret it will be like having your own goldmine and you won’t even have to dig!
Unfortunately life can never be that easy and we know in our heart that all of these claims must be false.
In that case, how does the comparatively small group of successful traders manage to take most of the profits from the commodity markets? Surely they must know something that the ‘others’ don’t know?
Well they do! The winning traders do know things that put them at the top. In a few words – they know how to trade successfully – and they do trade successfully!
If a secret is to know something that other people don’t know, then these traders certainly have some secrets that bring them their success. There are not very many of these ‘secrets’ and they apply equally to all traders. Individual traders may have their own slant on some of these secrets but when you boil it down they all amount to the same things.
That ‘winning system’ idea has some basis in fact but if you explore trading in more depth, you’ll discover that the ‘winning system’ is not all that difficult to find and is only a part of the trader’s success kit. You’ll also be pleased to learn that you will not need to purchase a very expensive ‘killer system’ on trust.
I prefer to call the trader’s secrets their special knowledge. To call them secrets implies that somebody is trying to prevent others finding out this knowledge.
That is not true.
Nobody is deliberately trying to prevent the spread of this knowledge
But neither is anybody trying to spread it!
Broadly speaking, the special knowledge of the successful traders falls into three categories:
1. The Trader’s Edge
Let’s explore that ‘killer system’ idea straight away and put it in perspective.
To succeed as a trader, you must have an advantage. If you had a system that produced random signals to buy and sell, you could expect to break even on your trading.
The only problem here is that there are trading costs to pay – so when you break even on your trading, you’re out of pocket!
With this random system you might be very lucky and strike a winning run that makes your fortune.
But you’re not likely to be very lucky, so it is probable that you will lose all your money sooner or later. You have no winning expectation because you are using a random approach to trading.
Whether they realize it or not, most traders are operating systems that have no winning expectation.
To show that your trading system rules possess an ‘edge’ you must be able to demonstrate that over a lengthy period of time, it is likely to produce a positive expectation. This can only be done by testing with historical data. It’s not a difficult task, once you have some rules to test.
How you obtain your system rules opens up another avenue of selection. Old and well tried rules are perfectly O.K. and some of the old ideas can still produce good results, although in time, the markets adjust to systems traded on them and what were once successful ideas may no longer produce good results.
New ideas and modifications to older ideas may be more likely to succeed – but the ‘successful trader’ will test all of this – he will make no assumptions.
Finding an edge is part of the trader’s work and he must have methods for obtaining or producing rules that may be worth evaluating.
You will encounter people who say that historical data testing is of no value. Ask these people what they would use instead. Also ask them why, if a system is said to be a good one, it should not at least be able to show a positive expectation with past data. You may then be able to discover their hidden agenda!
2. Personalizing Your Systems
With minor variations, all successful traders do the same things – the things that are essential for good trading. One of these essential procedures involves recognizing that every trader has a different attitude towards risk and this difference must be allowed for in the way the trader operates his system.
Even though a trader is convinced that his system rules have an edge, it’s of no use to him if it’s not capable of trading in line with his personal goals. If his system operates beyond his level of risk tolerance, the trader will not be comfortable following it.
Two things are needed to ensure this does not happen. First the trader must set his personal goals (if he has not already done so) and second, he must test the proposed system to reveal its capability to meet those goals.
3. Following your systems
Following your system is the real secret to success and the key to doing this is to remove your need to interfere with your live trading. This is much easier said than done - however it is the very essence of system trading. When you understand why this is so, you will be ready to trade.
Remember what legendary trader Richard Dennis said? “I could publish my rules in the newspaper and nobody would follow them.”
But why not, if they are good rules?
Knowing something is not the same thing as doing it. Richard Dennis knew that applying trading systems – even the best ones – requires something that human beings are not good at. Discipline.
Evaluating your system and trading it the same way – that’s what following your system amounts to. But how do traders achieve this?
The short answer is that they use systematic methods. System trading is all about a methodical trading - right from the beginning to the end.
I have been trying to explain the major areas where the successful trader’s special knowledge is concentrated. This is all very well but what is it that you actually have to know? What do you have to do to apply this knowledge to your trading?
You will remember me saying earlier that the successful traders are not deliberately trying to prevent the spread of their special knowledge.
You must bear in mind that the majority of these traders are tied up doing their work and have no inclination to train others, except perhaps their own colleagues.
However, there are some traders who believe strongly that the availability of affordable powerful computing and communication systems creates a never-seen-before opportunity for anybody who wants to trade his own money. There is a strong urge among some of these traders, to accelerate the transfer of information.
My friend and colleague, Curtis Faith and I both believe that the knowledge and resources for successful system trading should be available to private traders. We think this will benefit the trading business because there will be a level playing field for all and the bad image projected by certain types of trading products will be removed.
Curtis has made a major move in this ‘knowledge transfer’ concept by releasing his own personal trading software for public sale. These are the very first computer systems that enable private individuals to test their ideas in the same ways as those employed by professional traders.
My own contribution so far, has been to produce a complete ‘joined-up’ trading method for evaluating any system against the trader’s own personal goals.
If you like, I’ve put the best practice methods of the professional traders into one integrated process. Apart from drawing on my own trading experience and that of my colleagues, my research has brought me into contact with numerous other traders. That’s how I can say that, as I explained earlier, the successful traders all use the same basic methods ‘when you boil it down’.
Curtis has now written an important trading book – Way of the Turtle (published by McGraw Hill). In this book he explains the methods taught by Richard Dennis and Bill Eckhardt in that famous Turtle experiment. Curtis was one of the Original Batch of Turtles – in fact he was the most successful Turtle of them all – and that’s saying something.
For my own part, I have produced an eBook called The Ten Golden Rules of the Winning Traders, which is designed to help traders to get on the right track in their search for trading success.
The ‘Ten Golden Rules’ explains in detail what the successful traders do and brings some of the important principles of trade and money management to life. Active spreadsheet models are provided with the book to make certain aspects clear.
Although successful system trading requires a skeleton of methodical procedure, there is also a great deal of freedom. Freedom to choose any system rules, freedom to choose any markets, freedom to choose your own trading goals.
Very importantly, you also have the freedom to get involved with the nuts and bolts of trading detail or not. Whether to create your own system rules or not.
By giving the trading process a methodical base, it’s possible to remove the tedium and complexity from trading. This allows the trader to concentrate on the interesting part of the job, knowing that all the nuts and bolts operations will be dealt with automatically.
When you drive your car, you don’t want to have to worry about its engineering. It’s similar with trading - not many traders wish to get involved with the intricacies of trade and money management – they just want to know that this is being properly taken care of by their methods and software.
I hope that what I’ve explained about special knowledge is sufficient to enable you to see the dividing line between the successful traders and the ‘others’. I hope that this will help you with your trading decisions.
Tomorrow I’m going to send you an interesting
‘History of Systems Trading’
which puts into context the important discoveries and identifies the important people as the most profitable trading style developed into what it is today.
If you'd like to contact me about any matters to do with trading I'll be very pleased to hear from you.
Sincerely,
David Bromley.
P.S. – If you can’t wait until tomorrow, you can get your teeth into the ‘History of Systems Trading’ here:
Order the 'Ten Golden Rules of the Winning Traders' eBook Now
'The Secret of Systems Trading' - Part 1
'The Secret of Systems Trading' - Part 2
'The Secret of Systems Trading' - Part 3
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Copyright David Bromley 2005
All Rights Reserved.
Order the 'Ten Golden Rules of the Winning Traders' eBook Now
What readers say ...
Dear David,
Thank you for writing your 'Golden Rules.' I have found it to be one of the most pleasantly surprising experiences I’ve had of late, and I am stunned at the degree of integrity you have shown towards educating the non-professional commodity trader.
-- Colin B
CO, USA.
David does a great job of outlining a set of best practices for trend following system traders into his Golden Rules. His use of real world examples was original and insightful.
-- Jim T
CO, USA.
Dear David,
I have just finished reading your 'Ten Golden Rules' e-book, it was absolutely, brilliantly uplifting, honest and so so so educational.
-- Corey D
London, UK.
Dear David,
Thank you for producing the unique and highly informative 'Ten Golden Rules.' It’s one thing to read a long narrative on the importance of sound money management. It’s another to truly understand what it means. Thanks again for providing direction for my journey.
-- Nick S
MN, USA
I thought I knew them all until I read David Bromley’s ‘Golden Rules’ . It is truly inspiring and necessary for every trader.
-- Hal C
GA, USA.
David Bromley
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