Not so long ago, designing a trading system was viewed as a highly technical problem that required talented developers, special background, and great skill. An individual investor would no sooner build a trading system than he would a refrigerator.
Advertisements for brokerage firms signal that this has all changed. Several of the leading discount brokers now bombard television watchers with the same message: You CAN do this at home. One firm explains how easy it is to develop and back test strategies with their online software. Another uses rotoscoped images to capture the indignation of some investors who are all smarter than their brokers. A third shows investors making smart moves while taking a minute away from running the restaurant or the construction site.
At "A Dash" we have tried to show the challenges in developing systems and interpreting data. Making powerful software simple to use and data more readily available just makes it easier for non-experts to lose a lot of money.
One graphic example is better than many admonitions from us. Check out the story of a rookie prop trader and his foreign exchange system, as reported by Tyro. Tyro's friend was intelligent and methodical. He did a lot more work than most and took what he believed to be a cautious approach. After a month of awakening at 5 AM to test his system through paper trading, he was ready for the real show, going carefully with 2% positions. You can guess the result.
He did many things right, but it is so easy to go wrong. Go to Tyro's site and read the entire well-told tale. Thanks also to Trader Mike for highlighting story.
Aspiring system traders should read (at least) Fooled by Randomness and the Portfolio Management Forumulas, the first book in the Ralph Vince "trilogy" (both featured on our recommended list at the right). These books will explain many of the traps as well as some good methods for testing a system.
If you do not find these books to be real page-turners, (we did), then system trading is probably not for you.
