System Trading

System trading means any approach to trading which relieves you of the tiresome task of having to exercise your judgement, giving you instead a 'machine' for trading : the system automatically tells you when to buy and when to sell. All you have to do is pay for the system in the first place, and then you can watch TV while the system transforms you into a billionaire.

There are people, including some brokers, who will solemnly tell you that it is irresponsible to trade without a system, that the impersonality of a system is a necessary discipline to prevent you from treating the market as a casino.

They omit to say that gambling is not the only alternative to using a system. Another is something sensible and conservative along the lines described on page 1. Yet another is the kind of macro-economic judgement that George Soros exercised in his successful campaign against the pound.  Yes, I would call such massive, nail-biting punts 'campaigns', whose end is determined by the fulfilling of the predicted event, in this case a big fall in the value of the pound.

Think about it : if it were possible to devise a system for trading profitably, the owner of that system would become almost infinitely wealthy, and the markets in which he traded would cease to operate as indicators of real value. It's just plain silly to think that there's some way you can varnish your toe-nails while a 'system' gets you rich. If their system worked, it wouldn't be in their interest to sell it. The fact is, successful trading requires sound judgement and always involves some degree of risk.

Examples of pseudo-scientific mumbo-jumbo that is guaranteed to lose you money are :

~ The notion that markets move in waves, whose motion can be scientifically predicted. This is a particularly popular one because "after all, you only have to look at any chart to see that such waves exist". Yes, but try predicting the level of any given wave at any given time and you will find it is as futile an exercise as doing the same thing with real waves on a beach.

~ The notion that markets move in multiples of special numbers (Fibonnaci numbers are the best known), such as 33.33% or 66.66% or in special shapes such as triangles of a particular shape.  Gann, an architect of such magic shapes and numbers, is said to have died rich, but a book called "Winner Takes All" debunks this claim, saying he died a pauper. Linked to this is a ridiculous story that a group of Pygmalion-style beginners called "Turtles" was trained in the master's cunning ways and all became millionaires subsequently (and so can we all, for a fat fee).

~ The notion (surprisingly widely held) that markets can be interpreted astrologically.

~ The notion that markets always undergo a hiatus at the top and bottom of a wave, so that peaks and troughs can be foreseen by measures such as stochastics and relative strength. It's true, they do. They also undergo hiatuses in the middle of the wave, and in other places. Lots of other places.

Almost none of these systems is, in fact, 'automatic' and therefore they are not systems at all. Buried deep in the instructions you will find phrases such as "traders should exercise their judgement" before making a trade. The reason for this is obvious : if the system were 100% automatic, it would be easy to test and its failure would immediately be clear for all to see.


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