Trading Systems: What you need to know before investing.
What exactly is a Futures Trading System?
Futures trading systems are an automatic, computerized method of placing buy and sell orders. Trading systems software utilize the latest advanced computer technology to provide mathematical models based on past market prices, trends, divergence, momentum and other indicators.
Why use a Futures Trading System?
Emotional decision making is often a trader’’’s worst enemy (greed, fear, disbelief, etc.) System trading removes this emotional element from trading. In fact, many top-performing Commodity Trading Advisors now rely heavily upon computerized trading system software.
Besides eliminating second-guessing, whims and uninformed decision making, the advantages of using a disciplined, systematic approach to trading are numerous:
- A trading system generates instructions based solely on predetermined rules.
- A trading system can be tested and researched prior to committing actual capital to trade.
- A trading system can specify correct capitalization levels based on simulated performance, risk and draw-downs.
- The system rules determine the timing for order placement, not the trader.
- The trading system is emotionless; the system does not believe, feel, worry or obsess over a trade.
- System speculation is objective, disciplined, quantitative, technical, logical and precise.
Bottom line: Trading systems provide the much needed structure to trading. Each order placed is governed by a predetermined set of rules that does not deviate based on anything other than market action. A trading system will include specific money management parameters and the mechanical placement of those orders insures those rules are being followed.
The questions you should be asking right now…
Is a Trading System right for me?
A cardinal rule of successful trading: Adopt a definite trading plan. Because of the emotional stress inherent in any speculative situation, you must have a predetermined method of operation. That includes a set of rules you must adhere to in order to protect yourself from making irrational decisions.
Software for futures trading offers you the disciplined and unemotional approach to trading that can potentially increase your odds. In addition, the sheer processing power of a computerized trading system ensures that a watchful eye is kept on the markets around the clock. It would be impossible for a human trader to constantly monitor and analyze all global markets 24 hours a day.
To further highlight the value of following a system, here is a brief comparison of common characteristics of discretionary versus systems trading:
|Discretionary Trader||System Trader|
|Rarely trades with a plan||Has a predetermined plan|
|Generally follows the “hot” market||Participates in many markets and sectors|
|Spends hours analyzing markets||Spends minutes preparing plan for the next day|
|Overexposed in a single market||Diversified into multiple market sectors|
|Generally undercapitalized||Properly capitalized based on portfolio performance|
|Erratic trading results||Accepts his/her share of wins vs. losses|
Which Trading System should I use?
There are as many trading systems to choose from as there are trading objectives – plus new systems being developed as quickly as market dynamics change. So, in order to answer that question, you’re going to have to do a bit of exploring.Considerations include:
Knowledge – System trading requires a basic understanding of trading and the marketplace. There are many resources both offline and on — books, articles, reports and publications that will teach you trading basics.
Among the smartest things you can do is study the daily habits of winning traders. You will most likely find that they trade with a plan, analyze every trade and keep accurate records. Most traders know how much to trade, accept that not all trades will be winners and rarely if ever make the same mistake twice.
Capital – Aside from the obvious, “how much money are you prepared to risk,” most trading systems have recommended equity requirements. Whether it’s starting with $5,000 or as much as $100,000,000 you need to decide what portion of your overall investment portfolio can be allocated toward futures trading. Savings for college, retirement or emergencies should not be included in that number.
Risk Tolerance – Probably the most important aspect of any trading endeavor, whether using a trading system or not, is the ability to withstand losses and continue with your plan. Every individual is unique and has different risk tolerance levels. So, before you enter into a trade, determine how much of a loss you’re willing to accept.
Whether you express it as a dollar figure or percent of the margin amount, you should always keep some money in reserve. Nobody wins all the time in trading. Setting limits upfront will lessen the risk of emotional decisions should the market turn against you.
Single Market versus Multi-Commodity Systems — Single market systems are designed with a unique trading methodology targeted for exposure to specific markets of interest. Trading focus ranges from the S&P 500 to Bonds, Currencies or Metals.
On the other hand, multi-commodity systems provide trade instructions for more than one market sector and, of course, offer a broader spectrum of market exposure. Many
Multi-commodity systems are designed for trade across all market sectors.
Time & Patience-There is the time you spend in day to day trading activities – and the timeframe of trades in your system. Both are considerations in the system(s) you end up choosing. The duration of the trades that a system generates can range from quick trades for small, short-term profits to long-term trades aimed at capturing trends over a period of month. Since trading futures is a long term proposition and losses will be inevitably sustained over time, patience is paramount to your success.
Choosing A Broker – While you don’t have to be a market analyst or trading guru to succeed, the vast majority of system developers recommend that investors employ the services of a reputable system execution broker. Since many systems require constant monitoring, using a broker can eliminate virtually all the work associated with a system.
Wisdom Trading specializes in providing commodity futures managed account services. We will be happy to explain how the system you select can be traded for you. If you are a new investor, we can also assist you in constructing a diversified portfolio by allocating risk capital to professional commodity trading advisors and proven commodity trading systems.
6 Golden Rules For Effective System Trading
While there is no textbook approach to selecting a trading system, your ultimate success hinges largely on your ability to develop good trading habits. While phrases like “the trend is your friend,” or “cut your losses and let your profits ride” are accurate, you need to understand the substance behind them.
Rule #1: Make sure you’re properly capitalized. Your account must be able to sustain a draw down under the program without incurring a margin call that forces you out of the system before upside performance begins.
Rule #2: Have a plan and stick to it. Enter, exit and place your protective stops as the system dictates. Don’t hold back on taking a trading signal with the hope of getting a better price. As mentioned earlier, it is only by adhering to a preconceived formula that you can resist the temptations and emotional stresses that are inherent to a speculative situation. .
Rule #3: Set definite risk parameters. By setting limits from the get go, you’ll lessen the risk of emotional decision making. The truth is that people who are not in a position to accept losses (either psychologically or financially) should not be trading.
Rule #4: Diversify. Rather than exposing your entire trading account to a position in one futures contract, trade with markets, systems and timeframes that are unique in their methodology. This diversification is aimed at reducing the overall risk and exposure in any individual system or portfolio.
Rule #5: Study past performance. Most system developers maintain websites where you can view performance statistics. While some actually do show results based on actual trading, most provide hypothetical results accumulated by back-testing their strategies on past market data.
Since hypothetical results are prepared with the benefit of hindsight, they do not reflect true financial risk. However, you can still view past performance as a good starting point for research. You can evaluate key performance statistics such as current year-to-date return, average return, average winning trade, maximum draw down, average draw down and average losing trade.
Rule #6: Consult with an unbiased source. One of the best ways to learn more about the actual performance of trading systems is to seek out advice from those actively trading them. At Wisdom Trading our trading team provides valuable and objective guidance on trading systems. Since we receive no compensation for the sale of trading systems we recommend, you will get candid feedback that is in your best interest. Naturally, we have a vested interest in your success and helping you to meet your trading objectives.
What You Can Expect From Wisdom Trading System Management Team
No question about it, futures trading is high risk. And, though the innovations in trading software can help you increase your odds, there are many other factors that go into successful trading. At Wisdom Trading we pride ourselves on providing a level of customer service and cutting edge investment products that is unsurpassed in the industry. We will do whatever it takes to help you meet your goals.
Together, our systems management professionals have over 20 years of combined experience executing mechanical trading systems for individuals, corporations and commodity training advisors. If you want us to ‘hold your hand’ every step of the way, we will do that. And, if you want more control of the process, that, too, is your choice.
As a client of Wisdom Trading, you will be assigned a personal broker who will play a key roll in the day to day activities involved with managing your system(s) of choice. We will provide guidance on choosing a system, and help you put your trading plan into action. The day-to-day work is all handled for you – downloading data, generating trading orders and sending those orders to the exchange floor for execution.
During the trading session you will receive a fax or email detailing each transaction. Plus, you will receive a follow-up fax or email each evening showing you the positions you have, margin required, and profits or losses from the previous trading session. You also will be able to check into your account’s real-time activity at a secure web site anytime day or night.
Taking advantage of these services will ensure that all of the rules for successful trading are followed. It also means that you can devote your time to the things you want to do, not what your system tells you to do.