TaylorTree

Michael Martin wrote an interesting post on the importance of fundamentals in trading. Its a good post with solid points. Especially, the part about using your knowledge of the fundamentals of the market in build trading systems.

What struck a chord was the author’s take on system traders. Now, I understand who Martin was really writing about. He was referring to the traders who take the easy way out. Those traders who build Rube Goldberg machines rather than a trading system.

But, there are system traders out there who spent time in the trenches learning as much as they could about the markets they trade. Only to give up that knowledge in order to trade the systems they build.

I had to give these trading monks a plug…and comment on Martin’s post.

Martin edited my comment; making me sound smarter than I am. Thanks. Below is the unedited but less eloquent version:

You’re likely right…the title/moniker of the “expert” systematized trend follower could be their way to mask insecurity about their ignorance of fundamentals. But, let me present another side…

I agree with your point that understanding fundamentals are important; even for a systematic trader. But, believe there are levels of system trading that have to be considered.

If a person wants to become a non-system trader; then yes…long years of study of both technical and fundamental.

If a person wants to become a system trader; then yes…long years of study of both technical and fundamental.

Both sets will need to trade and gain experience putting their knowledge to use and more importantly the timing of that knowledge. The system trader is really an automator in this case. Taking intuitive rules the non-system trader has and standardizing them into something the computer can understand and spit out. From there, the system trader can evaluate the results and as you mention review the fundamentals. Trade based on the combination. Many system traders fall into this category.

There is another level of system trading. Requiring an additional set of skills in addition to the technical and fundamental.

These system traders must forego all their hard-earned knowledge and allow the system to work as designed once placed into production. They cannot care that Sugar fundamentals are aligning with price. They are indeed working on the average expectation of all their trades. And cannot get caught on the slippery slope of asking “why” they’ve lost money on the trade.

So, there is a remote chance you were talking with this level of system trader. Whose title/moniker wasn’t created to mask insecurity. But, to shield themselves from things which make trading the system hard. In some ways, these system traders are monks. Having to purge all trading belongings and follow only the rules given by their system.

But, I did mention it being a remote chance you were talking with this level of system trader. Anyone in this category would not use the word “expert” in their title. The longer I trade this way the less of an expert I become.

Look forward to your book. Of course, only in designing my systems.

Later Trades,

MT

# of Entries...........8
# of Exits.............9
WinRatio..............77.78%
Portfolio's ROI.......+3.44%
Market's ROI..........-1.35%

Later Trades,

MT

# of Entries...........7
# of Exits.............6
WinRatio..............66.66%
Portfolio's ROI.......+0.89%
Market's ROI..........+2.85%

April breaks the portfolio’s winning streak over the market. Wasn’t a bad month for the portfolio; just couldn’t get enough trades due to the earnings season.

April also marked a milestone birthday for yours truly. The family made it real special by shipping in live crawfish direct from Louisiana.

Ca C’est Bon!

MT

# of Entries...........8
# of Exits............10
WinRatio..............70.00%

Portfolio's ROI.......+3.38%
Market's ROI..........-0.10%

One of the challenges of trading this system is signal selection. The system generates more signals than money available. A ranking algorithm aids in signal selection and brings the portfolio closer to the signals the simulation would have taken.

Over time, I have developed a negative bias towards certain signals. By skipping these outliers; I am distancing my portfolio’s results from the simulation’s results. And I’m struggling with this. What would be ideal is to identify the quantitative nature of these outliers and add to the system’s rules. Of course, after rigorous testing. Until then, I’m left with this uneasy balance between trading the system and using bias in my signal selection process.

Case in point: several of the signals lately (as of 04/12/11) could possibly be held during earnings announcements. I try to avoid holding a stock over its earnings announcement. Yet, the system’s simulation tests did not contain this rule set and continued to produce excellent returns overall. Testing my bias is difficult due to the various earnings dates involved. Foregoing earnings season all together in simulations is not an option due to the cash drag effect. One solution to this problem is to collect enough walk-forward data points and manually test the effects of earnings announcements on returns. But, this is a simple example of how a trading bias can manifest in trading your system much differently than your trading system’s simulation.

Later Trades,

MT

# of Entries...........8
# of Exits.............7
WinRatio..............80.00%

Portfolio's ROI........5.82%
Market's ROI...........3.20%

February was a good month for the market and portfolio. The portfolio edging out the market’s return for another month.

Going to go on a bit of a rant here. Something that has bothered me a bit in the trading world for years — trading psychology. Trading psychology is a market unto itself. Books, blogs, websites, all kinds of info to help you become a better trader. Most of it? The wrong focus.

Why? The crux of the trading psychology stance is — don’t trade a system (even if its profitable) if it doesn’t match your personality. It’s all about finding the right match. Like those eHarmony commercials.

The trading world wants to embrace a yoga or martial arts viewpoint on trading success. Reminds me how people judged martial arts disciplines prior to UFC coming to light. In fact, I wrote about trading and fighting in a post almost 6 years back here.

Before there was a venue for everyone to see which fighting styles worked…students were inundated with rhetoric, philosophy, etc. You had all these theories about what worked in a real fight. But, nobody was fighting. Just talking and practicing strict rigid disciplines. Then the UFC came along and all these martials arts disciplines came together and actually fought. The winner shocking everyone. All these wonderful well thought-out disciplines just failed. All the finding one’s chi and structured katas just failed. Turns out…you’ve got to fight. It isn’t about finding yourself. Isn’t about finding your chi. It’s about fighting your opponent. It’s about taking advantage of your strengths and their weaknesses. See this video for the story behind UFC and the 1st winner of UFC. Please note…video shows real fighting. And be sure to see Ken Shamrock’s interview around 6:18 mark. Along with Joe Rogan’s comments around 9:24.

That’s why I wince every time I hear or read about finding a trading system that fits your personality. Or there’s only one way of trading – as we often hear with trend following. Damn, that’s a religion all unto itself.

Gracie took advantage of his amazing ground game and everyone’s lack of to win. But, you cannot stop there. You have to adapt…because your competitor’s adapt. The market adapts. The UFC adapts. There is no holy grail. No one way to do things. No black and white. It’s all gray. It’s all changing…all the time. Cause the participant’s are learning all the time.

It’s not about finding a system your comfortable with. It’s about getting comfortable with a winning system.

Despite the religion behind trend-following…I think it’s one of the best places to learn how to fight. It teaches you how to get comfortable on your back when the market is clearly kicking your tail. It limits the number of decisions you have to make at a time when your trading instincts and intellect are screaming to run away. Teaching you how to get comfortable with being uncomfortable in trading.

So, observe the markets, find profitable rules, and trade them. Despite how uncomfortable you find yourself trading them. Cause it’s not about you…as Charlie Sheen so eloquently states…it is about winning.

Later Trades,

MT

The portfolio finished the month up 2.82%. Not a particularly stellar month for the portfolio; but I’ll take a win over the market anytime.

# of Entries.......8
# of Exits.........7

As you can see with the above entries & exits; still not much activity for the portfolio in January. I’m hoping this next month brings more action to the table.

On the development side of the house; I hit a snag with the simulation engine’s backend database architecture. So, I’ve spent a few weeks performance testing the database components. I believe I’ve got all the performance issues squared away and plan to get back on track with the conversion over the next few weeks.

Later Trades,

MT