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Is There A Best Time To Begin Systems Trading?

04/07/11 08:48:58 AM
by Donald W. Pendergast, Jr.

Once you've identified a promising trading system, you'll still be faced with a very basic question: When is the preferred time to begin trading it?

Security:   N/A
Position:   N/A

The answer to this all-important question is found within the trading temperament portion of their psyches. Some traders may feel uncomfortable jumping on board a trading system that has already had a strong $5,000 profit run in a six-week period (particularly if the system typically tends to give back a portion of that profit after such a strong runup), while others may just as well decide to get in while the getting's good, figuring that a system in a major equity advance might keep on going, far surpassing previous gains in the equity curve. There can be good statistical reasons to adopt either viewpoint, but really, in the end, it's the trader who has to be absolutely comfortable with the rationale chosen.

FIGURE 1: THE SYSTEM. In a winning system, every strong runup in equity value always begins from some sort of a drawdown and/or consolidation phase. Only those with a sound understanding of the system's logic and the fortitude to stay with its signals can ever hope to reap the potential for rewards from thoughtful systems trading.
Graphic provided by: Market System Analyzer.
In Figure 1, witness the actual forward-test performance of a mechanical stock index trading strategy -- one that literally "hit the wall" (that is, an interim equity ceiling) after a lengthy period of out-performance. After making an all-time equity peak in late February 2011, the system proceeded to put in its largest historical drawdown to date, a whopping 17.3% downdraft. During the first part of the pink-shaded area (March 15, 2011), the system actually experienced eight losing trades in a row before bottoming out on March 23, 2011. Since then, the system is up by $2,040 and has recovered 85% of that most recent phase of the drawdown.

The big unknown is this: Will the system continue to pull out of this hole, perhaps even exceeding the gain of $8,350 it once made in a certain 14-week period of time, or will it continue to back and fill as it finds its way back into the long-term winning column?

There's no way for us mere mortals to know, but perhaps the next best thing to having access to reliably accurate prophetic insights is to dig through the reams of trading statistics of the system to see if there is a sound, numerically honest basis to believe that it will indeed continue to be a strong performer.

As a professional trading system developer, I am sometimes asked by prospective clients about which of my systems I think they should be trading, and I always have to tell them that only they can make that determination, as they alone know how much risk their accounts and trading psyches can handle. I suggest that they also seek to diversify their futures trading funds across a variety of noncorrelated systems (and not necessarily my own systems, either), if they have a large account -- and to trade them across a variety of futures markets.

Systems trading is all about managing risk and putting the probabilities for success in your favor as far as is humanly possible. Do some serious self-examination of your own trading style, risk tolerance, and ability to diversify across systems and markets and you may find that you will have moved your futures trading endeavors into a very favorable position, one that may help increase your long term profits even as it lessens your anxiety level.

Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title: Writer, market consultant
Company: Linear Trading Systems LLC
Jacksonville, FL 32217
Phone # for sales: 904-239-9564
E-mail address:

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