Trading System Design

In the Mentor Program we have been in the process of building and refining a trading system. The question was posed as to what I thought the greatest impediment is to generating such systems and by extension what is the greatest drawback that individual traders face. As always the greatest source of difficulty that traders face is themselves, systems fail because of the person driving it. However, the design of a system is problematic since you are attempting to apply rules to an arena that effectively has no native rules for trading. There are rules for market conduct but there are no rules for how you engage the market. Should it be your wish you can strip down the your y-fronts cover yourself in duck fat and run down Collins Street shouting that you are buying BHP. Outside of the poor decorum no one will care and more importantly nor will the market.

Traders attempt to overcome this lack of native order by applying ever increasing degrees of complexity and information to the market. There is a belief that information brings order to what appears to be chaotic. The result is complex and unwieldy systems that are often rooted in the superstition of prediction. It is hard to get traders of all levels of experience to let go of this noise and simply concentrate on the essentials of trading. In the face of stress or uncertainty it seems to be the default human setting to resort to magical thinking dressed up as procedure. The more procedure, the more you are distracted from the central problem but the more control you think you have.

In many ways my view of system design is most aptly summed up in this video.