Do Trading Systems Work?

Spend any time on the Internet researching investment ideas and you are going to run across myriads of websites trying to sell you their program, book or advice to trade stocks, options, commodities or currencies. Type a phrase into Google similar to the following: “options trading”, “commodity trading” or “Forex trading” and you will get an untold number of hits promising you easy riches of you just buy and follow their trading program.

The websites promoting these programs do an excellent job of feeding our biases and disrupting the critical thinking process. For me the strongest bias I fell when reading the ads is the self fulfilling prophecy. The idea is there has to be a program out there that can make easy riches and I just have to find it. The sales pitch of this type of program works to frame and confirm our desire for an infallible program.

There are many ways to make (and lose!) money in the market and short term trading is one of them. Trading hits us with the promise of quick wealth, while many of the other ways take time and discipline. The truth is, learning to be a profitable trader also takes a lot of time and discipline. The successful traders I know of spent many years learning their profession and are very disciplined about their approach. The successful trader has developed his own personal system that works for him. Trading is a very individual pursuit and the herd instinct eventually leads many to crashing the market (think about housing) as more and more investors pile onto the same trading strategy. Remember the professional trader from the French bank, Société Générale, who lost his employer over $7 billion making “safe” currency trades.

The answer to the headline question is No, but with reservations. Each of us must find an investment philosophy and style that fits our personality, from buy and hold blue chip stocks or broad based mutual funds to trading coffee futures in the CBOT pits. If you decide being a “trader” is something to pursue remember these few things:

No trading system will work as well in the future as it did in the past.
No one can predict the future.
Do not use leverage. When someone goes completely broke, it is almost always because they used borrowed money.
Don’t let anyone make your decisions.
Don’t ever do anything you do not completely understand.
Speculate only with money you can afford to use.

Thanks to Thomas Smiklas and his excellent investing blog for the above rules.

To be an investor that beats the professional money managers is an individual pursuit. It takes time, study, dedication and effort. Even then results are not guaranteed. It is easy to let our biases color our beliefs about our investment abilities and the best tool is to know ourselves well.

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This entry was posted on Monday, April 21st, 2008 and is filed under Investing, Psychology. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

One Response to “Do Trading Systems Work?”

Money Market Trading - July 14th, 2008 at 8:07 am
Buddy , I agree with this article, just sometimes I read so fast everything and I miss things that after read them again, I can understand it better.. ;). Your Blog Stumbled up and Bookmarked, so I keep updated on every article you write from now now on money market trading.