Here are some bullet points regarding trend following trading from this morning’s Money Show Webcast entitled “The Secret to System Development”.  The speakers discussed other types of systems as well.

Sandy Jadeja from ODL Securities (London) spoke first.  He said that most times that his firm gives a seminar on system trading, someone from the audience always asks for the exact system that they should be trading.  He believes that giving someone the system to follow isn’t enough.  There are guidelines and foundations needed.

Why Systems Trading?

 Most (futures?) pros use some sort of mechanical system
 Retail traders always looking for one holy grail system (bad)
 Many systems can work if used correctly (good)

Why use a system?

  To plan ahead
  You don’t want to react emotionally to news, you want to be prepared.
  To Anticipate the market moves (?)
  It can be quantified
  Software available for backtesting
  Emotions can’t be backtested (#1 enemy)

Markets are either in a state of expansion or contraction (trending or not).  If markets are trending, a system should get in at early part of trend.  We don’t know how long it will last.  Our goal is to ride it as long as it is trending.  The problem is trying to find the beginning of that move.  To do this, he likes range expansion systems, and opening bar breakout systems.  He does not like moving average systems because of their lagging nature.

Most of trading is about managing the trade.  This is difficult and requires active participation.  Getting into a trade is easy and quick.

Most people ignore position size, but this is the key factor. It doesn’t matter the probability of a trade working if you don’t manage position size.

Position sizing and money management are the keys to survival and capital protection.
When it comes time to trade, no thinking is required if the system is set up and tested properly.  The best thing to do once the trade is on is to manage yourself on how to become a better trader, not the trade itself.
 
Don’t try to perfect a good system. Work on having the discipline to follow it.  The perfect system will fail without discipline.

Most good trades work immediately — don’t tie up capital on trades that aren’t going anywhere. If the trade is not working within 5 days, exit it.

Purchased black box systems will likely fail because a trader won’t be confident in the rules if he doesn’t know them.  In order for a trader to have confidence in a system, he must know why he’s getting into a trade, why he’s getting out, why a particular position size was chosen, and why a particular market was chosen for trading.

The trader is the ultimate system.  He must have the proper mindset and committment and treat trading as a business.

Have a long view; don’t risk too much in the hopes that a single trade will work.

Does system trading still work?

Volatility has expanded…stops need to be further away, which means position sizes must be smaller.
Be responsible for your own trades (don’t blame him if any example systems don’t work!)

This was just the first of two speakers.  I’m about to get on another webcast entitled “The Best Traders You’ve Never Heard Of”.  I’m hoping it is as good as this morning’s session was!