A question arrives from a TN reader:
‘Aren’t you contradicting yourself when you’re dissing off the peg “forex systems” at the very same time you’re promoting the use of them?’
It’s a fair point and one that probably needs a bit of explanation.
My outlook can be stated like this:
-> System = closed-book, inflexible (bad)
-> Strategy = open book, rule based (good)
It’s easy to miss the subtle difference between ‘system’ and ‘strategy’ when it comes to trading so let me tell you more about what’s going on in my head here.
Systems Vs Strategies
In my mind a ‘system’ is a closed circuit. It is what it is and allows no further user input.
When trading a system the trader stumps up his money. He takes the trading actions required, sits back, and waits for his fortunes to accumulate.
The trader may not even know the structure and reasoning behind the trading decision he is supposed to put his faith in (these are called ‘Black Box’ systems).
The ultimate expression of the trading system is the trading ‘robot’: a preconfigured piece of software that makes all decisions and places trades on autopilot.
I’ve never trusted them.
I’ve heard too many tales of them trashing accounts when the algorithm encounters something a bit out of the ordinary in the markets and goes haywire, or where there was a bug in the coding to begin with.
The other common feature of ‘systems’ is that they tend to focus on near term market loopholes or tactical gains.
‘Strategies’ on the other hand take a more robust approach…
They give the user a proven logical approach to the markets. It’s still a rule-based approach but the trader remains firmly in the driving seat.
He applies his strategy according to market conditions. And he may choose not to trade a particular strategy a particular time.
For me a critical part of a ‘strategy’ is a full disclosure of the rules and decision that make it up.
By sharing the full details of what drives the strategy you empower the trader. And through knowledge comes confidence: if he knows why something works he’ll find it so much easier to put his faith in it.
(This is a MASSIVE factor to consider when it comes to developing self-discipline in trading.)
So just to be clear…
I believe open and rule-based trading ‘strategies’ are the key to long term success.
And the great thing is, the more ‘open book’ strategies you investigate, the more trading skills you accumulate. You can even build your own perfect trading method from ‘borrowed parts’ you come across in other strategies.
Think about it… if you investigated and dismantled just one new strategy per week you’d learn so much. You’d be a market whizz in no time!