Trading: Strengths and (Gasp!) Weaknesses
D. R. Barton, Jr.
are two distinct instances in my engineering career that I remember
more clearly than all the others rolled together.
Both involved pushing the button to start up multi-million
dollar chemical plants. Both
involved handling highly dangerous chemicals in extreme conditions.
uranium in a molten (liquid) state is a daunting task.
Uranium is, of course, radioactive.
And that brings lots of complexity with it.
But in our process (taking it from liquid state to solid
granules), the chemicals used could also explode.
And that was the less hazardous of the two plants that I
started up! The other
involved cracking natural gas and propane at extremely high
temperatures (over 1000 degrees) in huge vessels under very high
memorably, in both cases I was the one single person responsible for
�pushing the button.� Dozens
of careers were on the line each time I pushed the button to start
up a hazardous process. And
more importantly, literally hundreds of lives were at stake.
If we got things wrong, buildings full of people would die.
(After making those sorts of decisions over and over, it�s little
wonder that I have no problem pulling the trigger in my own
grounding and education in a systematic approach to things was born
of necessity; I was in positions where mistakes (at least big ones)
were unthinkable. So we
put systems on top of systems to help control the risk.
all of that, you can imagine that I prefer a systematic approach to
Trading � The Good, Bad and Ugly
are a million different ways to look at trading and investing
systems. And people are
widely divided in their thinking on systematic trading.
There are folks that think that systematic trading and investing
is the only way in the world to overcome our human biases and
psychological issues and any other way of trading is doomed to fail.
(The late Bruce Babcock would fall into this camp.)
the other end of the spectrum are folks that think that any
systematic/analytical approach to trading and investing is pure
black magic and has no relationship to what happens in the markets.
Michael Lewis espoused this view in his very readable book Liar's Poker.
will say (almost begrudgingly) that somewhere between those two
extremes lies the truth. I
have discussed trading with folks in the system and anti-system
camps. Both styles work.
And both have their pros and cons.
Performance Home Study Course, he interviews both a systematic
and an intuitive trader. (I�ll
stop here to say that if you are at all serious about trading and
investing, you MUST do this course.
It is by far the best educational value in the trading/
investing world.) Van
found that the intuitive trader was really quite systematic in how
he went about trading.
have found the same thing in dealing with folks who trade
intuitively. I�ll go
so far as to say that all of the intuitive traders that I have
modeled or worked with have merely internalized their systems to the
point that they implement them at an unconscious level.
cut right to the bottom line. Those
in the anti-system camp will insist that there is no such thing as a
�set it and forget it� trading system.
Their argument is that markets change and market dynamics
change in ways that are significant enough that no system can
maneuver to keep pace.
here�s the tough part for a system guy like myself � in the
absolute sense, the anti-system folks are right.
I really don�t know of a strategy that has run for decades
in a �set it and forget it mode.� But,
before folks go jumping to conclusions, this doesn�t mean that
system building is not useful or desirable � quite the contrary.
What it does mean is that systematic traders have to continue
to monitor and adjust their trading strategies over time.
this makes understanding the inner workings of systems design more
important, not less!
the other side of the coin, becoming an intuitive trader or investor
is something that takes significant amounts of time, experience, and
trial and error. To
develop this style of trading one must be willing to commit
themselves to the markets. There
are no real shortcuts here.
are some real advantages for both the systematic and intuitive style
of trading. Here are a
of Systematic Trading
traders can reach a level of competence more quickly than with
inputs can be programmed to allow computerized back testing �
this can raise a trader�s confidence.
followed with discipline, systematic trading can reduce
emotional effects in trading.
of Intuitive Trading
traders to use a broader variety of inputs.
opportunities to produce outsized gains in special situations
and outlier type events that are not easily captured
intuitive traders adapt to changing market conditions more
quickly than quantitative models, allowing them to avoid losses
or capitalize on changes before a mechanical model can even
discern that conditions have changed.
a series on system trading last fall, I wrote that many professional
traders and money managers that I know fall into a category that
makes them a hybrid � they have elements of their system that are
mechanical and other parts that are rule-based but not necessarily
mechanical (meaning that their decision making is repeatable, but
not easily programmable). This
combination provides benefits from both sides of the systematic vs.
intuitive fence. The
main drawback is that any non-mechanical trading style requires
experience to reach suitable proficiency levels.
bottom line is that for almost all traders and investors, a
systematic approach is the best place to start.
Learn how to build mechanical systems.
And equally important, learn how to implement and monitor the
performance of those systems. In
the course of learning a highly systematic approach, one can then
gain the exposure and experience necessary to identify areas where
more subjective rules can be applied.
really do believe that all successful traders have a rule set that
they follow consistently. Some
traders through experience, natural ability and self-mastery are
able to have wider latitude on their rules.
And as Van so eloquently reminds us, the most important thing
is that you, as a trader, identify your own trading style that fits
you best. This may
require some self-work and some trial and error to determine.
But the payoff is lower stress and higher performance
you can join
me and systems guru Chuck LeBeau in Cary, NC for the How
to Develop a Winning Trading System That Fits You Workshop, next
weekend, April 4-6, 2008.
D.R. Barton: A passion for the systematic approach to the markets and lifelong love of teaching and learning have propelled D.R. Barton, Jr. to the top of the investment and trading arena.
He is a regularly featured guest
on both Report on Business TV,
and WTOP News Radio in Washington, D.C., and has been a guest
Bloomberg Radio. His articles have appeared on SmartMoney.com and Financial Advisor magazine.
You may contact D.R. at
�drbarton� at �iitm.com�.