Commercial systems, are they all rubbish

[breadman]

Their is alot of talk about commercial or free systems. I was wondering what is considered to be a good system in terms of money it can make you. If you had a system that made you 100 points a month on indices or 200 pips a month on currencies on average per year for the last 5 years, would this be considered in the top 25 %. I do not have a system that can do that, but are their any systems that claim to do it or even achieve better results. Traders working in the city how many points, pips would they be expected to make per month.

Breadman

 

[Charlton]

Systems with a true edge would not be sold

Their is alot of talk about commercial or free systems. I was wondering what is considered to be a good system in terms of money it can make you. If you had a system that made you 100 points a month on indices or 200 pips a month on currencies on average per year for the last 5 years, would this be considered in the top 25 %. I do not have a system that can do that, but are their any systems that claim to do it or even achieve better results. Traders working in the city how many points, pips would they be expected to make per month.

Breadman

Systems, in the sense that I believe you mean, are codified sets of rules established within a software system to facilitate and accelerate mathematical calculations, which may be indicators, fundamental analysis, pattern recognition and other more esoteric measures.

When used with due application of thought based on experience and understanding of the underlying market they can be a useful aid that allows you to focus on that which demands deeper analysis. For this reason I would say that their most useful function is to act as a primary filter for entry positions, trends and reversals to which you can apply more considered analysis.

To be able to do this you must first understand the underlying market and instruments and then to understand exactly how the system has been programmed. Many people use these systems as "black boxes" not knowing how they really work or understanding the market. Even those who understand at a deeper level are unlikely to know precisely how the system has been programmed. It might, for example, yield the "correct" result 95% of the time, thereby creating a false sense of security and reliance upon it. There may, however, be some end conditions for which its authors have not taken account or, indeed, the underlying "rules" of the market may have changed. Clearly, as traders become successful in applying one set of rules forces within the market will seek to modify them to their advantage - perhaps ever so subtly but nevertheless dangerously.

Finally, on the subject of pips and whether a system falls within the top x% - any system needs to be interpreted by its users, so the success will depend on the understanding of its users as explained above.

For a system to fall within the top 25% it must have the edge. In other words its rules and calculations would have to totally inaccessible to the market. If the market knew the inner workings of the black box then they would shift the rules in order to recapture the edge. If the black box was totally opaque, do you think anyone would be selling it for £100, £1000 or even £10,000. I certainly would not.

Thus a system has to be transparent for you to trust in its signals and to be worth selling to others rather than protecting and, therefore, it cannot truly have an edge. The only system that can truly have an edge is one that you develop and safeguard for yourself.

Charlton

 

[the blades]

Evening all,

If I could add an alternative view;

I've attached an equity curve of a very simple, mechanical system for trading UK stocks. The curve "mechanical" uses an extremely simple filter, with no interpretation. This has been back-tested to the early 1990's.

The "discretionary" line is from back-tested data (up to March 2004), the discretion being an eyeball over the charts of mechanically selected stocks. From 2004, this is data from my own deals.

My conclusion - mechanical systems can work, so I'm sure some commercial ones do. The reason they (some people) fail is because they don't have the discipline to stick to the rules. In a world full of "get rich schemes", it's difficult to stick to rules of a system when it isn't performing too well. People jump to the next system, probably just at the wrong time.

All IMHO.

Cheers,
UTB

 

[Charlton]

A system aids but cannot replace the correction applicaiton of thought

Evening all,

If I could add an alternative view;

I've attached an equity curve of a very simple, mechanical system for trading UK stocks. The curve "mechanical" uses an extremely simple filter, with no interprutation. This has been backtested to early 1990's.

The "disctrionary" line is from backested data (up to September 2004), the discrtion being an eyeball over the charts of mechanically selected stocks. From 2004, this is data from my own deals.

My conclusion - mechanical systems can work, so I'm sure some commercial ones do. The reason they (some people) fail is because they don't have the discipline to stick to the rules. In a world full of "get rich schemes", it's difficult to stick to rules of a system when it isn't performing too well. People jump to the next system, probably just at the wrong time.

All IMHO.

Cheers,
UTB

Hi TheBlades

You seem to be suggesting in your second sentence that no interpretation is required and that you can blindly follow a mechanical system with success.

As I said in my posting systems can aid you, in the same way that despite being taught long division at school I generally use a calculator. However I understand the underlying mathematics of division, logarithms, linear regression etc and it means that I can spot errors when automated tools don't seem to give the correct answer. This ability to spot the flaws is generally a "gut feel", as when despite several bottles of wine at a restaurant I can sense that there is something wrong with the bill. I am not knocking mechanical systems as an aid and a tool provided they are not 100% mechanical.

I agree that systems can instil some kind of discipline in the trader, but not if they are fully mechanical. That type of discipline is militaristic in nature - that kind of unthinking and automated adherence to the rules. I certainly concur with you that discipline is important. However surely discipline is internal therefore no mechanical system can embrace all the rules required to trade to the highest level of excellence.

In your conclusion you state that "mechanical systems can work, so I'm sure some commercial ones do". Do you put your trust totally in a mechanical commercial system programmed by another ? Look around you - are there are truly successful and fully mechanical systems in any other area of life that you would put your trust in never to fail ?

Chalrton

 

[the blades]

Hi TheBlades

You seem to be suggesting in your second sentence that no interpretation is required and that you can blindly follow a mechanical system with success.

As I said in my posting systems can aid you, in the same way that despite being taught long division at school I generally use a calculator. However I understand the underlying mathematics of division, logarithms, linear regression etc and it means that I can spot errors when automated tools don't seem to give the correct answer. This ability to spot the flaws is generally a "gut feel", as when despite several bottles of wine at a restaurant I can sense that there is something wrong with the bill. I am not knocking mechanical systems as an aid and a tool provided they are not 100% mechanical.

I agree that systems can instil some kind of discipline in the trader, but not if they are fully mechanical. That type of discipline is militaristic in nature - that kind of unthinking and automated adherence to the rules. I certainly concur with you that discipline is important. However surely discipline is internal therefore no mechanical system can embrace all the rules required to trade to the highest level of excellence.

In your conclusion you state that "mechanical systems can work, so I'm sure some commercial ones do". Do you put your trust totally in a mechanical commercial system programmed by another ? Look around you - are there are truly successful and fully mechanical systems in any other area of life that you would put your trust in never to fail ?

Chalrton

Eyup Charlton,

The Mechanical system, I believe, could be followed easily and profitably. However, it goes without saying that it's better to sanity check the outcome of any filter.

I think it would be extremely difficult (mentally) to follow a system whereby you didn't understand the rules inside and out. However, that doesn't mean that "they're all rubbish".

Again, I really believe that the edge is in the discipline itself, rather than (or more so) the system itself.

To answer your question, I don't operate any commercial systems, so my money isn't where my mouth is. However, most systems can be made more robust by operating more than one at once - so I wouldn't rule it out.

"However surely discipline is internal therefore no mechanical system can embrace all the rules required to trade to the highest level of excellence" - there's no doubt in my mind that the more skilled the trader, the higher the rewards.

Cheers,
UTB