Automated Stock Trading Systems by Laurens Bensdorp

Author:Laurens Bensdorp
Language: eng
Format: epub
Publisher: BookBaby
Published: 2020-02-07T21:19:03+00:00

Conceptually Correct Systems

In today’s world we have access to unprecedented computing power. We can backtest many, many different parameters. Certain software providers even have an “optimize” button that looks at all the parameters and tells you, “if you did this, and this, and this, you would have the best results.” Some people think that is a great way to develop a trading system, but really it’s just data mining. It will tell you how to set the parameters to take advantage of everything that happened in the past—but the future will always be different, and your results will be, too—potentially very different.

On the other hand, if you wish to develop a conceptually correct system you will start with a premise, such as “I know a long-term trend following long system will make money when the market goes up, and I expect it to lose money when the market goes down.” Or let’s say you want to develop a long-term trend following short system. You know that most years it is going to lose money as the market rises. Every year, it loses a few percent. But when a big crisis comes, like the collapse of 2008, you know you’re going to make big money. You’re taking those losses as an insurance policy.

Compared to mining data to get the “perfect” system, look for concepts that you know will work in certain situations. You define simple rules that measure price action in certain markets and apply a conceptually correct idea of when to enter and exit.

If then we combine multiple correct concepts, it gets as close as possible to the Holy Grail.

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