Is the "system" part really so easy to come by? | Forex Factory

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Is the "system" part really so easy to come by?

  • #1
  • First Post: Nov 10, 2005 8:38am Nov 10, 2005 8:38am
Hello everybody,
After reading some posts on this and other forums, and also reading Trade Your Way To Financial Freedom (which everyone seems to recommend); it appears to me that most people think that trading is just a mind game, that the most difficult part is discipline rather than finding a system.

Van Tharp says there are hundres of thousands of working systems; someone here (was it fiji?) said that their are more working systems than traders; someone else (I think dial) said once "it's just a matter of finding a system with positive expectancy".

However, some facts seem to contradict that view, starting with the very book by Van Tharp. He almost disregards the system aspect (mentioning, of course, that a system should have positive expectancy) to the point that in one chapter he goes something like "hey, you want a system? here ya go one", and proceeds to explain the "Foolish Four" strategy for stock trading. After reading this I immediately went to www.fool.com in order to read more about the strategy, and guess what... the very developers of the system have found that it doesn't work, because it was based on some bad data.

Another issue to take in account is the Yahoo! forum of Metatrader system development. There are many intelligent people contributing to it. Maybe a hundred mechanical systems are stored there. None of them works. The systems are developed, discussed, patched, discussed again, patched again, patched once again and finally abandoned when a new idea is introduced. There you have, a community of hundreds of people trying to code a profitable system (be it simple or complex) and they haven't succedeed yet. A similar thing happens at Moneytec; and I haven't checked the Coder's forum here.

So my question is, where are the hundreds of thousands of simple working systems? Why have these people failed to find at least one of them? Since 95% of traders lose money, could it be true that 95% of traders are just undisciplined? Or is it rather that the 5% have actually developed a "feel" for the market that can't be accounted for in a system, and that the 95% lack?


Sorry for the long post, and thanks in advance for any comments.
Bonete
  • #2
  • Nov 10, 2005 1:26pm Nov 10, 2005 1:26pm
hi,
as several traders have demonstrated on other boards... even flipping a coin can be profitable with the correct R/R

its a matter of perspective

Rgds..
  • #3
  • Nov 10, 2005 2:51pm Nov 10, 2005 2:51pm
Quote
Maybe a hundred mechanical systems are stored there. None of them works. The systems are developed, discussed, patched, discussed again, patched again, patched once again and finally abandoned when a new idea is introduced.

Patched and patched again. Sounds like these systems were over optimized. No wonder they don't work.

You asked about simple system. I think that is the key: SIMPLE! I have found the cleaner and more basic a system is, the better it performs over a longer period of time. That's one of the reason's I don't use indicators. Too much clutter on the screen and with the possible exception of seeing divergences, they don't tell me anything that's not already visible in the price.

As dsvt1 said, even coin flipping can be profitable with good money management. Same thing for just price and a single moving average. In fact, if you've got the knowledge, you can be profitable with price alone. Can't get much simpler than that. That's why I am excited about what James16 will be teaching in the PF. I can't wait to learn his stuff in detail (alright, I'm cheating. I've already peeked :-)

I'd add one other thing. In addition to keeping the system as simple as possible, trade it on longer timeframes like 4 hour or daily. Anything less than 1 hour gives me the willies, but that's just me.

That's my perspective for what it's worth.

Dial
sxaxlxvxaxtxixoxnxbxyxgxrxaxcxexdxoxtxoxrxgx
  • #4
  • Nov 10, 2005 4:11pm Nov 10, 2005 4:11pm
I don't have much trading experience yet. However, I think human nature is what it is in any discipline. There are just some people who want to appear to be "the smartest person in the room."

I'm a preacher. That pretty well means the source material that I use in my "discipline" is basically limited to one book that, in most editions, is around 1,000 pages long. Its been around for a long time and still reads the same way today that it did a long time ago. But you'd never know that from endless books written by authors who claim to have discovered some new teaching or thought from it. I doubt seriously they have come up with something that the mulitudes of authors who have written before them for 2,000 years had not yet discovered. There are just some preachers who are not content to say the same old truths in the same old ways. You can't get noticed that way.

Sounds like that is what is happening above. There's no glory in doing what james16 has been showing in his chart thread, or just using a simple MA system, etc. And for many people that's not enough.

Again, I don't trading well yet, but the best preachers I've ever heard didn't wow me the creativity of their thinking, but with their grasp of the same old "boring" truths that even a child can learn.

I suspect the best traders are the same. Their good because they have a grasp upon the "boring" fundaments of price actions and tried and true indicators, not by their creativity of their "holy grail" system. Am I close?

Jonathan
  • #5
  • Nov 10, 2005 4:14pm Nov 10, 2005 4:14pm
SoyYoConBonete, you are one of the first people ive heard make this point. i agree 10,000%!

personally i feel that the "emotion" part of trading is made out to be harder than it is, and the "gaining an edge" part of trading is made out to be easier than it is.

controlling emotions, following the rules of the system, staying consistent....that is all very easy for me.

finding a system with an edge is incredibly hard, though. for every 50 systems i program, i MAY find one that is tradable. and even then, that one system may break down in a couple months.

my guess is that when people underestimate the difficulty of finding a system with an edge, what is really happening is that they are being fooled by the back test results. if you dont have a STRICT process for developing your systems, one that keeps hindsight out, you can come up with great systems all day. any monkey with a keyboard can do that. its only when you take a scientific approach to system developement that you realize how hard it is to find a system with a real edge.
Relax and be happy.
  • #6
  • Edited 5:31pm Nov 10, 2005 5:26pm | Edited 5:31pm
SoyYoConBonete, diallist, Merlin

After 2 years of learning and trying various systems I am finding that what you are all saying is spot on. Indicators are also basically confirming (and usually lagging) price action which already exists and which can be read and acted upon as James16 is showing -- with bars too, rather than candles.

True, a method must be followed studiously if it has proved profitable, and this requires discipline in observation plus alerts, in entries, stop losses, targets and exits, but all of this effort is of little use if the method is weak.

Most of us lack the means to test a method unless by demo, and/or by laboriously manually checking charts, and the hype on the web seldom matches the reality when a system is tried.

Further, for most of us, watching or waiting for a setup and signals on a 15M or even 1H chart is not that practical, whereas the 4H/ Day/Week combination is more feasible even if those elusive 10-30 pip shorter time-frame trades are lost; but we don't get the inevitable losses either.

jbamaj, I must mention that the "one book" approach to Christ's truths without the interpreter, has the built-in frailty which has produced many contradictory recipes, which His Church with His memorial sacrifice avoid, notwithstanding the dissenters within. At least if we dissent from a trading method, we know that the author has not been commissioned to teach it as truth but presents it as workable for him in the material world and we can try it or try another of our making.

Perhaps one or more of the systems looked at by FT that compare and contrast may be of considerable help

With best wishes to all.

Trinity
  • #7
  • Edited 6:15pm Nov 10, 2005 5:26pm | Edited 6:15pm
Quoting diallist

As dsvt1 said, even coin flipping can be profitable with good money management.

Dial
Please explain to me what money management you can use and make money by simply flipping a coin. I will test the money management on 10 years worth of data (depending on the timeframe you want to run with) and I will show you that it doesn't work.

If you find a system that is completely mechanical in nature, backtests well, all you need to do to make money out of it is to use an API to trade it for you. Where does psychology come into that?

Psychology is important if you use a discretionary approach to trading but not so important when you have a purely mechanical system that works. Finding one of those is a lot more difficult then flipping a coin!

edit: The idea of being able to randomly buy something and use money management to make money works on stocks which have an upward bias but since the FX market doesn't have a upward bias it doesn't work IMO.

Simon
  • #8
  • Nov 10, 2005 5:56pm Nov 10, 2005 5:56pm
http://www.iitm.com

IT SEEMS THEY ABOVE ALSO SAY THE SAME THING.
DOWNLOAD THE GAME AND PLAY IT.

HIGHWAY
  • #9
  • Nov 10, 2005 7:48pm Nov 10, 2005 7:48pm
I've always thought that trading is 70% psychology, 20% watching the charts, and 10% fundamentals. I can't really speak for systems, although I paid one mentor a minimal charge to learn his key methods and another even less $ to learn his MA system, both of which taught me many things I needed to know.

I will tell you this much about the psychology part. It'll wipe out one of those silly $300.00 mini accounts in a heartbeat. It'll wipe out accounts of much larger amounts if not taken into consideration. Welcome to the Forex market, baby. Sit down, strap yourself in and hold on tight because you're in for the ride of your life. This coming February will mark two years since I've been riding along and I ain't fell out, I've just grabbed on tighter.
Because helping each other is a good thing.
  • #10
  • Nov 10, 2005 8:09pm Nov 10, 2005 8:09pm
Quoting diallist
Patched and patched again. Sounds like these systems were over optimized. No wonder they don't work.

You asked about simple system. I think that is the key: SIMPLE! I have found the cleaner and more basic a system is, the better it performs over a longer period of time. That's one of the reason's I don't use indicators. Too much clutter on the screen and with the possible exception of seeing divergences, they don't tell me anything that's not already visible in the price.

As dsvt1 said, even coin flipping can be profitable with good money management. Same thing for just price and a single moving average. In fact, if you've got the knowledge, you can be profitable with price alone. Can't get much simpler than that. That's why I am excited about what James16 will be teaching in the PF. I can't wait to learn his stuff in detail (alright, I'm cheating. I've already peeked :-)

I'd add one other thing. In addition to keeping the system as simple as possible, trade it on longer timeframes like 4 hour or daily. Anything less than 1 hour gives me the willies, but that's just me.

That's my perspective for what it's worth.

Dial
I have a feeling that I'm gonna like your system Dial.. As I've discovered, I can't trade the intradays for the moment mostly due to emotional and time involved..

P.S.
Can you tell me what you saw?
  • #11
  • Edited 10:46pm Nov 10, 2005 10:39pm | Edited 10:46pm
Quote
I have a feeling that I'm gonna like your system Dial.. As I've discovered, I can't trade the intradays for the moment mostly due to emotional and time involved..
Thanks East. I think you'll like it too. But I want to make one thing clear. My "system", and I call it that very loosely, is based on a trading model developed and backtested by someone else. I've had the audacity to call it "my" system because I've added some refinements that fit me and work for me. I'm also putting together a sequenced set of instructions about how I trade it. There will be a discussion forum to go with the system instructions. I am anticipating there will be some subscribers who will relate to the way I trade it and will ask questions of me. There will be other traders who wont relate to the way I trade it and will want to modify the system. I'm all in favor of that. I'm really hoping that the more experienced subscribers who come into the forum, will dissect the system and come up with alternative ways to trade it. That would be an ideal scenario that everyone will benefit from. In my introduction, I am encouraging everyone to treat the discussion forum like a college classroom. I am hoping that lively discussion from "student participation" will make my section more enjoyable for everyone.

Quote
P.S.
Can you tell me what you saw?
No! Absolutely not! Haven't you heard? I'm "Big Brother", the "King of the Censors"! My job is to hide good information away from the prying eyes of newbie traders! What a crock! Anybody who knows me, knows how ridiculous that idea is. Nevertheless, the post I made that started the whole mess is the worst post I've ever made on this forum. "Plain Stupid" doesn't begin to cover it. I think I'll go find it, if it hasn't been deleted by the admins and reply to with a correction/retraction.
sxaxlxvxaxtxixoxnxbxyxgxrxaxcxexdxoxtxoxrxgx
  • #12
  • Nov 11, 2005 1:13am Nov 11, 2005 1:13am
I agree you Dial, system must be as simple as possible.

The trader with bad trading method but with good money management skills can outperform a trader with good trading method but bad money management skills.

If you want to be consistently profitable trader you'd better develop good money management skills than some unnique system or findings.

But if you can manage to develop both of them that'll be really excellent.
kiss the trend
  • #13
  • Nov 11, 2005 2:34am Nov 11, 2005 2:34am
Money management is part of a system.

Simon
  • #14
  • Nov 11, 2005 4:02am Nov 11, 2005 4:02am
Quoting DrRock
Money management is part of a system.
yeah, the easy part.
Relax and be happy.
  • #15
  • Edited 5:38am Nov 11, 2005 5:08am | Edited 5:38am
[quote]
Quoting SoyYoConBonete
it appears to me that most people think that trading is just a mind game, that the most difficult part is discipline rather than finding a system.

Van Tharp says there are hundres of thousands of working systems; someone here (was it fiji?) said that their are more working systems than traders;
Sorry but that one is a misquote. I said that there are more profitable systems than there are "profitable" traders.

Sorry if I seemed to be minimizing the difficulty involved in finding or creating a profitable system. There are profitable systems here like MB's, like "cash and carry", There is enough information in James16's thread to make a profitable system, make that "more than one profitable system", the system I created for VP is a good system. Traded in concert with some PA analysis from James16's thread it would be downright scary. There are a few other systems around on the internet for free that have stood the test of time. However for most people overcoming their fear and greed is harder. I won't go into all the reasons because I've been getting far too much criticizm lately for long posts.

Quote
someone else (I think dial) said once "it's just a matter of finding a system with positive expectancy".
Simple yes. Easy no.

Quote
Another issue to take in account is the Yahoo! forum of Metatrader system development. There are many intelligent people contributing to it. Maybe a hundred mechanical systems are stored there. None of them works. The systems are developed, discussed, patched, discussed again, patched again, patched once again and finally abandoned when a new idea is introduced. There you have, a community of hundreds of people trying to code a profitable system (be it simple or complex) and they haven't succedeed yet. A similar thing happens at Moneytec; and I haven't checked the Coder's forum here.
I have this theory that committees, especially online public ones do not make good trading systems. I also notice that most of them go about it in a rather flawed manner. Frequently some kind of entry signal is discovered or re-discovered and someone posts it. Then it whipsaws so everyone sets to work employing a thousand different indicators to find ways to filter the whipsaws. This is done on historical data that gets rehashed until the system is nicely curve fitted to reflect the data they've used over and over so much that they know every whipsaw area and every large trend. The experiment with exit on top of exit and entry modifications out the ying yang until it finally looks like it catches most of the big moves in that data set and misses most of the whipsaws. Then they trade in real time and the system breaks. People have exhausted their ideas which are mostly versions of each others ideas and the thread dies out. I just told you exactly how not to design a system.

Quote
So my question is, where are the hundreds of thousands of simple working systems? Why have these people failed to find at least one of them? Since 95% of traders lose money, could it be true that 95% of traders are just undisciplined? Or is it rather that the 5% have actually developed a "feel" for the market that can't be accounted for in a system, and that the 95% lack?
Most will not publicly disclose their system. Some do.

Discretionary systems are much easier to design but harder to trade with discipline and harder to learn market feel because it is hard to separate objective qualitative judgement of market conditions from emotional judgement that is reacting to risk.

Mechanical systems are much harder to design because most people try to create mechanical systems with characteristics that are unrealistic. People want too big of an edge and thereby end up with excessive drawdowns.

The reasons people design systems badly is due in part to trying to achieve the impossible or the improbable.

Trading material that teaches this stuff is marketed to appeal to the wrong things and people read it with the wrong outlook and thereby filter important information out.

If a system produces an 80 percent return in a year but has 30 percent drawdowns in backtesting you can be pretty certain that future drawdowns will be larger at some point in the future. Why not trade with 1/2 the leverage and you'll get a 40 percent return with 15 percent drawdowns? Many people would rather look for a better system than do that. Again that is their psychology at work filtering out something profitable but not enough to get rich from (in just a year or two) in favor of something better they have not found.

I know how to get 15 percent interest loaning out mortgage money (for first mortgages) that is secured by real estate worth no less than double the amount of the mortgage. Nobody gets excited about that even though it is an extremely secure investment with a very high return. But if I tell people they can put money into an IPO for a gold property or an oil/gas play and buy shares for 25 cents where the IPO opens at a 1.25 they line up to risk their money. The same thing happens in the way people go about finding or creating systems. IMO getting past all the misleading thinking (psychology) is the most difficult task for most people.

But if you get your thinking straight and your expectations in line with reality it is much easier to find or create systems you'll trade with less difficulty. I know people who trade successful systems I cannot trade. I know what they trade and I know how they trade but I'm not built to trade that way. It is not just a matter of finding a system with a positive expectancy. It has to be a system where YOU personally have a positive expectancy for the system. There is a difference.

FT
  • #16
  • Edited 5:37am Nov 11, 2005 5:29am | Edited 5:37am
Quoting merlin
finding a system with an edge is incredibly hard, though. for every 50 systems i program, i MAY find one that is tradable. and even then, that one system may break down in a couple months.

my guess is that when people underestimate the difficulty of finding a system with an edge, what is really happening is that they are being fooled by the back test results. if you dont have a STRICT process for developing your systems, one that keeps hindsight out, you can come up with great systems all day. any monkey with a keyboard can do that. its only when you take a scientific approach to system developement that you realize how hard it is to find a system with a real edge.
Isn't underestimating some things, and being fooled by others, very much like making assumptions that are derived from poorly founded beliefs rather than objectivity? Have you considered that by your having eliminated approaches to system development that contain greed, fear, or accompanying denial, or just plain ignorance, that you may have eliminated some major psychological barriers for yourself? Therefore when you trade a system you have deveoped perhaps you find it easy to follow rules and not be emotional because you have confidence stemming from using realistic system design methods that keep you objective? Whereas that is foreign to people who have failed to weed out their ill founded beliefs and concepts about trading and systems? That all sounds like psychology to me.

FT
  • #17
  • Nov 11, 2005 6:54am Nov 11, 2005 6:54am
Thanks you all for your input.

Fiji, I'm very sorry for the misquote, I never intended to put words in your mouth. I liked what you said here:

Quoting fijitrader
Discretionary systems are much easier to design but harder to trade with discipline and harder to learn market feel because it is hard to separate objective qualitative judgement of market conditions from emotional judgement that is reacting to risk.
As it's clear from my post, my personal belief is that lack of discipline AND inability to learn market feel (with more emphasis on the latter) are the two reasons why most traders fail.

Let's take for example james16 system thread (please anyone feel free to correct me if I'm misquoting or misunderstanding anything about it). The basic idea of his system is to enter after certain candle formations which happen at "confluence" points. The truth is that if I want to enter any trade, almost always I will be able to rationalize it with the system. There are hundreds of points from where to draw the fib, hundreds of different trendlines, several types of pivots, several types of support/resistance lines. I could probably find almost any post in the chart to be a "confluence" point. I think the reason why james16 (and others) is successful trading it is because he has learned which trendlines are valid and which ones are not, which fibs are valid, etc.

My point here is that the difficulty with discretioary system lies in really LEARNING it, rather than just memorizing the steps required to trade it. You also have to learn when not to trust your system, and that comes from a subjective market feel; which takes (for most) a long time to learn and, as fiji says, is very hard to separate from emotions.


Regarding the coin flip subject, I'm 100% certain that if you use a coin BOTH for entry and exit, not even an MM formula designed by Stephen Hawkings will make you profitable. Maybe you guys were talking about using it for entry and then exiting discretionarily? In this case I believe you can be profitable; but only if you have the "market feel" to know when the coin was right and let the trade run.

Best regards and thanks again to you all for your comments,
Bonete
  • #18
  • Nov 11, 2005 7:38am Nov 11, 2005 7:38am
Hello SoyYoConBonete,

Qoute: www.iitm.com
Trading and investing are very simple processes and we human beings try to make it into something much more complex. Unfortunately, we have a lot of biases that enter into trading decisions.

"I believe people get exactly what they want out of the markets and most people are afraid of success or failure. As a result, they tend to resist change and continue to follow their natural biases and lose in the markets. When you get rid of the fear, you tend to get rid of the biases.

"As for risk, most people don't understand it, including a lot of professionals, and what's really interesting is that once you understand risk and portfolio management, you can design a trading system with almost any level of performance." —Van K. Tharp

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

Can the following de tested ?

1. Any pair
2. Flip a coin to decide entry BUY/SELL
3. 2% of your account
4. stop Loss 50 pips from entry
5. Trailing stop 20pips once it resches 100 pips in profit direction.

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

There is also a demo game he uses to prove his point at www.iitm.com

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

I tried, MAYBE it was chance, it was profitable.

XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
  • #19
  • Nov 11, 2005 8:06am Nov 11, 2005 8:06am
Quote
Is the "system" part really so easy to come by?

No.

In my opinion, you DO need to develop a system with an "edge" and a relatively benevolent win/loss or risk/reward ratio. I do think that no matter how carefully your place your stop losses or how carefully you calculate your lot size, if you're using the wrong tools or you dont have the skills to recognize properly price action, channel breakouts, etc, you will be walking a rocky path.

HOWEVER, it is equally true that whether your system has an "edge", if you're incuring in mistakes such as overtrading, over leveraging, lack of discipline, letting fear/greed dictate your decisions or simply not looking at the big picture or major fundamental data (such as interest rate differential if you trade long time frames), you WILL also blow your account in the long run.

Like any other professional field, you need to master both the technical and the psycological aspects of it in order to achieve consistant success.
  • #20
  • Nov 11, 2005 8:46am Nov 11, 2005 8:46am
WTB, I agree 100% with you. My point is that learning the system and skills is usually diregarded as the easy aspect of trading, when it is far from being easy or simple. Even an "authority" like Van Tharp disregards it. Seems like he shot himself in the foot, since in his book he chose to support one of the "few" systems that don't work.

Highway, it would be interesting to test that. I'll try to do it next week; as I need to import lots of data in Wealth-Lab to program it.

Best regards,
Bonete
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