Designing a Robust Trading System

by Ken Long

One of the first questions the new trader will ask is how to develop a trading strategy that works in all market conditions.

If you think about this as a design problem you will realize that this is always the most difficult task of all. Such a system would have to be both strategic and tactical in outlook. It would have to be able to sense market condition and select the appropriate parameters for effective action.

This means it must distinguish between opportunities for channel trading and opportunities for trend following. It would have to know when to get on board a breakout and when to fade. Because these answers are very conditional based on market context, such a system would have to be very complex indeed.

Think about this design problem from the metaphor of hand tools. The best tools for a new craftsman to use are those that are simple to understand and apply and have been optimized for specific task.

An apprentice becomes a journeyman over time by learning how to master and apply specific simple tools to a wider variety of jobs with each passing day.

No craftsman would intentionally use an overly complex combination if he had a simpler effective tool to use for a carefully defined task.

We need to bring that same sensibility to our trading instead of trying to find systems that master all possible contingencies in the market, we need to be identifying clear moments of advantage that are aligned with our capabilities to exploit. Learning how to recognize those conditions in applying the appropriate tool in a simple direct manner is the way to build task competence.

In this model of professional competence, it makes sense to find relatively frequent opportunities to trade which can be managed with a simple system and in which risk can be managed. You don’t start as a craftsman on the most dangerous powerful tools in the shop. You start on simple tools where learning can be experiential but safe.

From a systems design perspective then, instead of trying to master the entire market from the beginning, we should be looking for ways to master certain defined segments that minimize risk and yet provide enough opportunity to learn and master the craft.