|  DEC 1990

Beating The Market With An Expert Trading System by Jerry Felsen

Beating The Market With An Expert Trading System by Jerry Felsen A mathematically provable trading system (MPTS) can be defined as a trading method for which superior expected performance can be proved scientifically. I measure system performance by means of a risk-adjusted return—that is, the index of performance is a ratio of the expected return divided by the corresponding expected risk. To ""beat the market"" earning an above-average risk adjusted return (RAR) is the key. It's easier to beat the market with an MPTS than by methods that rely mainly on a good track record. The standard approach to beating the market is to research an investment advisor, trading system or investment manager whose past track record shows superior performance. For instance, investors who don't have time to trade may select a money manager who recently outperformed the market averages. Investment managers and traders will usually choose an investment method or trading system whose historical performance has been superior and hope that it will continue to beat the market. The media are full of advertisements from investment advisors or money managers who claim to have outperformed the market in the past. We are constantly exposed to advertisements selling trading systems with fantastic historical track records. There are also hundreds of books, seminars and articles describing superior trading systems. But their performance is backed mainly by a good-looking historical track record—often a simulated track record. Yet almost every investor who turns his money over to a money manager with a good track record ends up disappointed. Almost every trader who buys a trading system with a fantastic historical performance ends up a sucker.

by Jerry Felsen, Ph.D.