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I want you to think about the thought process behind any trade. The trade idea originated through what i consider as ' systematic deduction '. To make such systematic deduction and find opportunities , you need to question what is happening in the market and sometimes be willing to take contrarian positions.
'Systematic deduction' is one of the most popular methods market participants adapt to trade the market. However, not all systematic deductions are right, you could of course succumb to biases and make systematic errors while making these deductions. Nevertheless, systematic deductions is one of the most popular techniques to trade. Other popular trading techniques being -
None of the above mentioned approach to trade the market, including systematic deduction can really be defined as a process. These are ad-hock methods, which cannot really be quantified or backtested.
Any approach to trade where you cannot really define 'the approach' as a process is not considered as a trading system.
On the contrary, if you can define the approach and can quantify the process to trade the market, then you are essentially talking about a 'trading system', which is exactly the focus of this blog.
The moment you talk about a trading system, people generally tend to think of these systems as a sure shot technique to make money, or in other words, they approach these systems as a money making machine. They expect profits to roll from the first trade itself. Unfortunately, it does not really work that way.
Remember, a trading system receives a bunch of inputs from your end, performs a set of task, and gives you an output. Based on the output, you then decide (or the system itself decides) if this a trade worth taking or not.
Market Based Inputs → Trading System → Decision to trade
'Systematic deduction' is one of the most popular methods market participants adapt to trade the market. However, not all systematic deductions are right, you could of course succumb to biases and make systematic errors while making these deductions. Nevertheless, systematic deductions is one of the most popular techniques to trade. Other popular trading techniques being -
๏ Trade because your guts says so
๏ Trade because your friends says so
๏ Trade because the guy on TV says so
๏ Trade because my broker says so
Any approach to trade where you cannot really define 'the approach' as a process is not considered as a trading system.
On the contrary, if you can define the approach and can quantify the process to trade the market, then you are essentially talking about a 'trading system', which is exactly the focus of this blog.
Trading System - the Holy Grail ?
Remember, a trading system receives a bunch of inputs from your end, performs a set of task, and gives you an output. Based on the output, you then decide (or the system itself decides) if this a trade worth taking or not.
If you realize, for the trading system -
1. You give the system the inputs
2. You design the system
3. You decide to trade or not to
So the making money really depends on you. The advantage of a trading system, however, is that you only have to decide the logic once and then just follow the system that you have designed.
1. You give the system the inputs
2. You design the system
3. You decide to trade or not to
So the making money really depends on you. The advantage of a trading system, however, is that you only have to decide the logic once and then just follow the system that you have designed.
What to expect from this Blog ?
The trading system that we will discuss in this blog will be complete, in the sense, it will have -
1. The logic, which is the core of trading system
2. Input parameters
3. Interpreting the output
4. The decision to trade or not
At this point, I have planned to write about the following 4 trading systems -
1. Pair trading
2. Volatility based delta hedging
3. Calendar spreads
4. Momentum strategy (portfolio approach)
There two techniques to pair trade - a similar approach based on correlations and a slightly complex approach using statistical concepts - both of which we will explore. As we proceed, I may try and add other trading systems as well.
However, this blog will not include the 'backtest' bit. It is on you to backtest the system and figure out if the system works for you or not. You will have to take the rules of the system and figure out how many times in the past it has worked and if it is worked, what kind of profitability pattern the system is showcased.
Remember, no trading system is complete without having the backtesting results. The only reason why I'm not including the backtesting part is that I lack programming skills. Some of these systems can be efficiently backtested if you can manage to write a piece of code. When these systems were developed, I was fortunate enough to have a fellow trader with programming skills, hence I was in position to get greater insights into these systems. I must also tell you that these were fairly competent systems to trade and I presume they still are.
The broader objective of this blog to showcase different systems and give you insights into how systems are developed. Hopefully, this blog will inspire you to develop your own trading system and perhaps works out to be your own money making machine.
1. The logic, which is the core of trading system
2. Input parameters
3. Interpreting the output
4. The decision to trade or not
At this point, I have planned to write about the following 4 trading systems -
1. Pair trading
2. Volatility based delta hedging
3. Calendar spreads
4. Momentum strategy (portfolio approach)
There two techniques to pair trade - a similar approach based on correlations and a slightly complex approach using statistical concepts - both of which we will explore. As we proceed, I may try and add other trading systems as well.
However, this blog will not include the 'backtest' bit. It is on you to backtest the system and figure out if the system works for you or not. You will have to take the rules of the system and figure out how many times in the past it has worked and if it is worked, what kind of profitability pattern the system is showcased.
Remember, no trading system is complete without having the backtesting results. The only reason why I'm not including the backtesting part is that I lack programming skills. Some of these systems can be efficiently backtested if you can manage to write a piece of code. When these systems were developed, I was fortunate enough to have a fellow trader with programming skills, hence I was in position to get greater insights into these systems. I must also tell you that these were fairly competent systems to trade and I presume they still are.
The broader objective of this blog to showcase different systems and give you insights into how systems are developed. Hopefully, this blog will inspire you to develop your own trading system and perhaps works out to be your own money making machine.
