What if I told you it was possible to be up over 30% year to date trading just QQQ about once every other day. Sound boring? And the only thing you had to do was to turn on your computer—well, not the only thing—and that you would have to have a thoroughly tested trading system first. And if you did, here is what your year might have looked like (the results are from a backtest using one of our trading systems, and are net of commissions and net of assumed slippage of a penny per share since the trades didn’t actually occur):

So let’s think about this: why is system trading something that might be interesting to all of us?

1)      For most new traders, it takes countless hours of screen time to achieve a steady income, let alone one with lots of zeroes. And many never make it past the most rudimentary levels on their own.

2)      For more experienced traders, daily stock selection is of utmost importance because in today’s market where high-frequency trading dominates the volume, it is becoming more and more difficult to trade more than a handful of names every day.

3)      And for the most experienced traders making big bets every day, wouldn’t it be nice to have a steady income in the background so you can focus on the really important things that computers just can’t do. The tens of thousands of hours of screen time have patterned your brain in certain ways that cannot be matched by a computer.

System trading lets us address all these issues:

1)      Building and testing a trading system is not just throwing together a few of your favorite indicators. It takes a substantial amount of development and more importantly, testing, to be sure that it really does what you expect in all market conditions and in all the timeframes that you trade.

2)      There are basically three ways to use a trading system:

• It can be an additional tool that we use in conjunction with our normal techniques and setups.
• It can be a gray box that generates potential trades that we decide to take or not.
• It can be a fully automated black box that executes all the trades with no manual intervention.

3)      For right now, let’s focus on the fully automated systems—the black boxes.

• If you have a thoroughly tested black box, you can not only trade QQQ or a handful of names every day, you can trade hundreds of names if you have the capital. This not only reduces the risk, but just like the casino, you have a well-defined edge, so the total income is based on the number of times the dice are rolled or the wheel is spun or the hand is dealt. It is a numbers game—the computer has no emotions so it just trades.

• This frees you up to focus on what you do best, whether you are just getting started or you have been in front of your screen for years. If you are just learning, you can focus on that rather than worrying about how to pay your rent this month, and if you are already extremely successful, you can focus on what is working today, and if nothing is working, your computer is still working for you.

• You can match your black box to your style and needs—maybe you would like a conservative box so that you can execute a more aggressive personal trading style. Or maybe you would prefer a box that has different styles that adapt to the market.

• And boring ? Let the computer do the boring stuff like making money consistently while we hone our skills to do the things the computer cannot.

Is it a panacea—no. Is it easy to build—no. Will it work for you—maybe. Does it already work for thousands and thousands of traders—absolutely.

Next time:  What Is A Trading System And How Do We Know It Will Work?

For more information or answers to your questions, email Rick at [email protected]

* Hypothetical computer simulated performance results are believed to be accurately presented. However, they are not guaranteed as to accuracy or completeness and are subject to change without any notice. Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Since, also, the trades have not actually been executed; the results may have been under or over compensated for the impact, if any, of certain market factors such as liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any portfolio will, or is likely to achieve profits or losses similar to those shown. All investments and trades carry risks.