"Human beings never think for themselves, they find it too uncomfortable. For the most part, members of our species simply repeat what they are told--and become upset if they are exposed to any different view. The characteristic human trait is not awareness but conformity...Other animals fight for territory or food; but, uniquely in the animal kingdom, human beings fight for their 'beliefs'...The reason is that beliefs guide behavior, which has evolutionary importance among human beings. But at a time when our behavior may well lead us to extinction, I see no reason to assume we have any awareness at all. We are stubborn, self-destructive conformists. Any other view of our species is just a self-congratulatory delusion." - Michael Crichton, The Lost World

Tuesday, January 16, 2007

Beliefs Come First

Some people believe that an entry signal is the first (and only sometimes!) step in trading system development. In my experience this is a very short-sighted approach. For me, beliefs about yourself, the markets, and the objectives for your trading all come before any actual system design takes place.

The first 7 items in system development that I use are:

  • Beliefs – your interpretation of ‘reality’ that you will base your trading on
  • Objectives – what you want a trading system to achieve
  • Hypothesis – an idea about how a trading system could work
  • Market Selection – what market will your system be implemented in
  • Instrument Filter – which instruments within the chosen market(s) you feel are ‘tradable’
  • Setup – conditions that determine a trade is possible
  • Entry Signal – conditions that determine it is time to enter a position

Note that 6 major items come before you even get to an entry signal! Also note that the objectives you have for your trading system come before development not as a result of it. If you don’t know what you are trying to achieve how can you design a system that meets you goals?

Because you need to design a system to meet specific objectives (how else can you determine if it is working or not) it is very important to make sure those objectives are realistic and can probably be achieved with enough hard work. Expecting to double your account every month with only 10% draw-downs is never going to happen (although I have encountered ‘traders’ who wanted to achieve these kinds of results).

You may be thinking “How do I know what’s reasonable/achievable/sensible for me?” and I can’t answer that question in a blog – it depends on how much time you have to design, develop, and implement your trading system and what your level of expertise it right now. I recommend you get professional help/advice to guide you through this process rather than “taking a shot in the dark” or “setting yourself up for a big disappointment”.


Paul King
PMKing Trading LLC
Source: http://www.pmkingtrading.com/


Posted 6:51 PM

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