What is a Futures Trading System?
A trading system is simply any logical methodology for selecting, entering, and exiting trades. Most trading systems also include methods for defining risk and money management. A trading system can be as simple as “sell corn when harvesting starts” or it may be much more complex and include a dozen different technical indicators. Essentially, all traders use some sort of a system that takes into account varying amounts of data and formulates an action based upon such data. The difference depends on how rigid or loose their method.
Discretionary versus system trading
When most speak of trading systems they are referring to computer trading systems, which are marked by their automatic and rigid nature. If a discretionary trader alters or varies his methodology for choosing and executing trades then his is not truly mechanical in nature. It may still be called a system, but it doesn’t offer the uniformity that a mechanical rule-based system does. Discretionary traders often view their trading decisions as something of an art, with intuition and judgment playing a crucial role. Some of the best traders in the market are discretionary participants. However, it requires a great deal of self-confidence, skill, and experience to consistently profit this way.
On the other hand, system traders apply a mechanical system that has been tested and provides a statistical edge. Mechanical trading systems are typically tailored to certain types of trading or market conditions: day-trading, trending markets, volatile markets, etc. System traders follow these rule-based systems rigidly and without deviation in order to avoid the danger of making decisions tinged by emotion and hampered by a lack of knowledge.
Who should use trading systems?
There is a bewildering array of trading systems available on the market today. One reason for this is that there is a hungry market for them. Many traders reach a point when they become exasperated by the seemingly random nature of the markets and with their poor performance as discretionary traders. This frustration typically causes them to lose heart and wonder if they can ever succeed at making money. So, naturally they reach out for hope and certainty and think “Eureka!” when they discover the many computer trading systems on the market – all boasting exceptional accuracy and guaranteed profits. While mechanical trading systems may be a good fit for many traders, buying one while in this frame of mind is not a good idea. Expecting a trading system to be a magic pill will simply cause further disappointment.
To be sure, trading systems have many merits and may be the best answer for some traders, especially those that have difficulties in exercising discipline and with making sense of large amounts of data. However, one should not view them as automatic money-making machines.