I received a great email about a week ago from a subscriber (let’s call him TF), asking my thoughts on the trading of systems. TF had viewed a number of webinars advertising various trading systems and was particularly interested in two. The first company trades a simple chart pattern combined with a proprietary indicator overlay on emini futures. They also offer ongoing trading room support (at a significant cost). The second is based on proprietary software and appears to be suitable for any market.
The cost of both seems to be dependent on the options chosen. Certainly, with addition of ongoing trading room subscription, the cost is in the many thousands.
Unlike most people investigating these types of systems, TF is actually approaching them with a very realistic attitude and mindset. He is not expecting some Holy Grail means of achieving profitability through no effort. Instead, sees them as an opportunity to ‘get his feet wet’ and learn within a live-market environment – a very refreshing attitude.
Some extracts from his email:
“On several forums, I have read that trading systems are not effective. I am wondering if you have an opinion on that. Also from the standpoint of "getting your feet wet" by actually trading, why wouldn't a simple system with instruction (as most systems provide help desks along with live trading webinars each week), while not committing a lot of money, provide a learning environment? I realize one may not make a fortune, but that would not be the point. The point would be getting a feel for trading.”
“I am aware that most of these systems are not "flexible" in the sense they do not perform as well in some market conditions as others.
The only reason I bring this up is because at this stage of my education, I don't feel I could outperform a canned system, and I'm just wondering if you see this approach making sense.”
The following is part of my response…
I feel your frustration. I've been where you've been and it's not easy.
My personal opinion about 'systems' is that they do not (and cannot) work consistently enough to produce profits. At least at the retail level – I have no doubt that the larger institutions have working systems that are able to scalp fractions of a cent at a time – but this is not available to us as we don't have sufficient capital and we don't have access to deep wholesale costs, nor the necessary computer power.
Why don't they work? To perhaps oversimplify the situation, it is basically that the market is constantly changing in its form. As you suggested, systems perform well in some market conditions but not well in others.
The people who trade successfully with systems usually have a diversified basket of systems, each optimized for different market conditions, so that overall they 'hopefully' get some profits. Even then there is some discretion involved – at what point do you remove a non-performing system from the basket? This is not easy.
To trade one system only, I don't believe you can achieve long-term consistent profitability, unless you set up a trading room and employ some high-pressure-NLP-trained salespeople to sell the system for you. 🙂
Now, that being said, if I read your email correctly I believe you're considering getting a system, not with the expectation of profit, but with the intent to 'get your feet wet'. If this is the case then yes, a system is great for this purpose. Getting your feet wet in the markets through a system can provide considerable benefits:
allowing exposure to the market, which leads over years to internalizing the patterns of market flow (if you wish to ultimately trade a discretionary system)
allowing you to develop trading session routines
allowing you to experience the range of emotions, and learn ways to minimize their impact on your decision making processes. (Note: you can't trade without emotions (assuming you're human), rather you need to learn to trade with them)
allowing you to learn how to document a trading plan
allowing you to develop consistent and disciplined implementation of your trading plan.
These are great benefits. Be sure though that you don't trade the system for one month, lose money, and decide to discard it for something else that comes along. Use it not for profits, but for developing yourself as a trader – learning to manage your self, setting up routines for trading, reviewing your performance, and improving.
Who knows, you might be able to adapt the system to something that fits your personality well, ultimately leading to a profitable strategy.
So, where to get a system?
I am familiar with (company name removed), however I have a policy of not spreading negativity about any other system or strategy. My opinion is simply an opinion and may not be factual. So, let's leave them alone. I am not familiar with (second company name).
What I would recommend is to take the several thousands you were willing to spend on these companies, place it into a trading account, and trade. Use a system that is available for free that will probably provide just as good a signal as these expensive courses, and learn though getting your feet wet in the markets. I'll provide an example of a valid strategy below.
Of course, the only thing this won't provide is ongoing support. You will be on your own, unlike (company name removed) where you'll have some ongoing assistance through the trading room. However, that trading room support is not much use three months down the track when you decide you don't like their strategy, you can't afford the losses anymore, you don't like the negativity in the room, you don't like the moderator, … (insert any number of other reasons)… or you start to listen to the nagging feeling that you've been ripped off and the system doesn't work at all.
You mentioned bull and bear flags. Yeah, they're a great setup. As you said though, the trick is identifying them. This develops over time through just watching price action. An alternative though is to trade a system that identifies pullbacks within a trend (a bull and bear flag is really nothing more than a pullback within a trend). The following links provide a system that I believe is as good as anything you can pay thousands for on the marketplace, trading pullbacks in a trend. It's called the 9/30 setup:
http://www.trading-naked.com/mb-9-30-setup.htm – these are the rules for the 9/30 setup. Ignore the oscillators on his charts – they're not part of the system. Just stick with the rules.
http://www.trading-naked.com/FloorTraderMethod.htm – this is the Floor Trader Method, which I believe is the origin of the 9/30 setup. This is a great document and essential reading, regardless of whether you trade the straight 9/30, or include the additional Floor Trader nuances.
Some variations on the same theme (in case you prefer them to the 9/30, or wish to incorporate all into one system):
MACD setup: (conservative entry)
http://www.trading-naked.com/mb-macd-conservative-setup.htm ; (aggressive entry)
Range Expansion setup: (using REI, which most platforms won't have)
http://www.trading-naked.com/mb-range-expansion-setup.htm (using stochastic)
http://www.trading-naked.com/mb-fast-stochastic-setup.htm (additional notes)
Do not discount the value of the above (9/30) strategy, just because it's provided for free and just because it appears incredibly simple. www.trading-naked.com have provided a great service to traders here – this system could have been sold for thousands.
If you feel you need the hand-holding available through a trading room, then this system may be of no use to you. Otherwise, take the money you would have spent at (company name removed) or elsewhere, and use it to practice this system. Over time, when you've developed some consistency, start watching the price action to see where the signals are occurring within the bigger picture market structure. You may be able to implement some discretionary aspects that lead to consistent profitability; learning which setups to take and which to avoid.
I don't know which market you wish to trade. What I do recommend though is that you first source a free demo or simulation platform, and learn to trade the strategy without exposing money to potential loss. Trade with a business-like approach – document every decision and review it after the session to LEARN and ADAPT. Do not go live until you have demonstrated consistent profitability in a simulated environment. And when you do finally go live, do so with the smallest position size possible. Do not increase position size until you've demonstrated consistent profitability at each level. And be sure to set a drawdown limit, at which you'll stop trading if results go too far negative.
If you're unsure of which market or timeframe suits you, just pick what feels most comfortable at this stage. There is no right or wrong answer. Just pick what feels comfortable now and LEARN in a sim environment. You can always change later.
Sorry this is a long email – they're rarely this long – I just really want to save you from a several-thousand dollar mistake.
To wrap it up, please see my disclaimer page (http://yourtradingcoach.com/disclaimer/). All the standard disclaimers apply – none of the above is advice. I don't know your personal or financial situation, so there's no guarantee that the above information is relevant to your circumstances. It's simply what I believe to be a better way to get 'systems' exposure to the markets. But there are no guarantees. As I said at the beginning, I don't believe a system can be long-term profitable by itself (without discretionary input). I do believe though that the 9/30 will come closer to profitability than most of the other rubbish on the marketplace. So check it out – if you like it and believe it might match your preferred style of trading, then give it a try.
6 Feb 09 Update
Follow-up to last week’s 9/30 system
The following is some of the most common Q&A that followed the recent links to the 9/30 system:
Q: Do I actually trade the 9/30?
A: I do not trade the 9/30 system. This was simply a recommendation to another reader, for a simple strategy to get started in the markets. His goal was not necessarily to profit, but just to 'get his feet wet' and experience the markets. However I do trade pullbacks in a trend. They provide a great setup. I determine my setups and entry points in a more discretionary manner, which fits my style better than a mechanical approach such as provided by the 9/30. Everyone's different though. Some will prefer the 9/30 style of entry. Other's may use it to develop over time an intuitive appreciation for where the pullback reversals are likely to occur, leading to development of their own discretionary approach.
Q: I've run this through some back-test software and it doesn't appear profitable?
A: This is not a Holy Grail money-making system. I really believe that if traded mechanically (with every signal taken automatically) then it WILL MOST LIKELY LEAD TO LOSSES. The beauty of the system is that it provides a simple structure to the market to allow a newbie trader to LEARN. With experience, I believe that combining this structure with some discretionary input regarding where the signal is occurring within the market structure, and the nature of current price action movement, then it could lead to profitable results.
Also, please review my ebook, “The Importance of Exit Strategy at this page: http://yourtradingcoach.com/ebooks/ . As well as using discretionary input into where in the market structure you take these trades, success will also largely depend on how you exit the trades. Test different approaches before risking capital, and find something that works best for you.
Remember as well that the strategy is designed for a trending market. You'll need some means of determining when the market is trending and when it's ranging, to allow you to avoid as much as possible the periods of choppy congestion.
Q: Which market is this for? Can it be used for forex?
A: This strategy applies to any market, provided it contains sufficient liquidity. So, stick to those markets that offer larger volume, tighter spreads and smooth, flowing price action.
Q: What timeframe does this work on? Does it work intraday or is it just for daily charts?
A: This strategy applies to any timeframe, once again though ensuring sufficient liquidity and smooth, flowing price action. It can easily be applied on daily charts if you prefer, but can also be operated intraday. On forex, I'd be sticking to the majors only. And if used on an intraday timeframe I'd be trading the UK and US sessions only, with a timeframe down to not less than 5 mins (GBP/USD might be ok down to one or two mins if the market is flowing nicely). For the emini's, I imagine there would be no problem down to one min charts. Of course, test everything first.
Q: Is it best to use the 20EMA or 30WMA?
A: The www.trading-naked.com website recommends the 9EMA combined with either the 20EMA or 30WMA. It really doesn't matter which you pick. The author says they prefer the WMA. I only ever use EMAs. But really it doesn't matter. Same with the MA periods – there's no reason why you couldn't use 9/18, or 10/20 or anything else at all. There's nothing magic about the numbers. The only thing you need to do is be consistent with your choice.
Here's another author's approach (very similar) for trading pullbacks in a trend: http://www.swing-trade-stocks.com/learn-swing-trading.html
One of the readers has shared the following strategy which they have been trading very successfully for the last six months. It's called the "Moving Average MACD Combo", by Kathy Lien and Boris Schlossberg. You can find details here: http://www.investopedia.com/articles/forex/08/MACD-combo.asp
This strategy is based on a different trading concept. Rather than attempting to trade pullbacks, it's attempting to get onto a trend early in the trend's development and ride it for as long as possible. So check it out as well if you're still searching for a way to get your feet wet in the markets. Maybe you can relate to this concept better than a pullback in a trend?