20 Most Common Trading Mistakes by Kel Butcher

Author:Kel Butcher
Language: eng
Format: epub, mobi
Publisher: John Wiley & Sons, Ltd.
Published: 2011-12-16T05:00:00+00:00

Creating certainty in an uncertain environment

The uncertain and supposedly complex nature of ‘the markets’ creates all sorts of irrational responses from those trading without an edge. Those who have a trading plan or system with unambiguous rules and a mathematical or statistical edge are able to trade with a high level of confidence. They are able to trust in the outcomes of the system and achieve a level of calmness and certainty not evident in those without such an edge. These traders have moved well beyond the point of focusing on the outcome of each trade and instead focus on the process of applying the rules and money management principles of their edge, confident that the system will deliver the expected results over the long term.

The ultimate measure of the edge for any system is shown by its long-term equity curve. This needs to be steadily rising and have been traded through a diverse range of market conditions to indicate its real performance during live market trading. An edge with a positive mathematical expectation needs to outperform the market net of brokerage and slippage in live trading conditions. An edge also needs to be able to outperform the market averages in up and down markets by deploying money management and risk management techniques that maximise exposure during rising markets, minimise exposure during falling markets and reduce portfolio drawdown during extreme market downturns.

The chart in figure 10.1 depicts the actual equity curve (top line) of a system called SPA3 (<www.intelledgence.com.au>) that has been traded mechanically in real time with unambiguous entry and exit criteria from 25 January 2001, compared with the Australian all ordinaries index (bottom line). The system has traded through the 11 September 2001 terrorist attacks on the World Trade Center, the 2002–2003 bear market, the 2003–2007 bull market and the 2007–2009 global financial crisis bear market.

Figure 10.1: SPA3 hedge system equity curve

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