Getting Starting With Systematic Trading
by Michael R. Bryant
Systematic trading is a popular and potentially profitable
way to trade a variety of markets, including stocks, futures, and foreign
exchange. In systematic trading, a trading system generates buy and sell signals
using a predefined set of trading rules. In many cases, the trading system can
be automated so that it will automatically execute the buy and sell orders
through a brokerage. The basic steps to getting started with systematic trading
are presented below.
Step 1. Setting up your hardware. Most
trading systems are designed to run on a Windows platform. While it may
not be necessary to have a dedicated machine to run the trading system(s),
the computer should be fairly recent, preferably running Windows 7.
Almost any new desktop computer will have sufficient memory, speed, and
disk space for trading. Perhaps more important than the computer is
having reliable, high speed internet access, particularly if your focus
is day trading, where fast order execution is important.
Step 2. Choosing the market. Systematic
trading techniques can be successfully applied to a variety of markets,
such as stocks, ETFs, futures (e.g., E-mini S&P 500), foreign exchange
(ďforexĒ), options, etc. Each market has its own characteristics,
advantages and drawbacks. Different markets, such as futures, may
require a different brokerage account than stocks or forex.
Step 3. Decide on your trading style. Trading styles can be characterized
in terms of the time period (day trading, short-term (swing trading),
longer-term), trend versus counter-trend, single market versus portfolio, etc.
Day trading is often attractive because exiting positions prior to the close
tends to limit risk. However, profitable day trading strategies can be more
difficult to find, and higher-frequency trading tends to be more stressful for
Step 4. Select a trading platform and broker. Some trading platforms are
provided by brokerages, while others allow connections to a variety of brokers.
The key to platform selection is that the platform must be able to run trading
strategies or systems. Some of the more popular platforms for systematic trading
include TradeStation, Ninja Trader, Trade Navigator, eSignal, MultiCharts,
AmiBroker, and MetaTrader (forex). If youíve already selected a trading strategy
(step 5), this may dictate your choice of platform as most trading systems are
available for a limited number of different platforms.
Step 5. The strategy. For those who have the inclination, building your
own strategy can be a good choice. Otherwise, a strategy can be purchased from a
system vendor. Building a trading strategy can be a long, trial-and-error
process and typically involves programming in the scripting language supported
by your trading platform. Whether developed or purchased, careful testing is
required to fully understand the characteristics of the strategy and to verify
Step 6. Fund your brokerage account. Some brokerages, particularly forex
brokerages, allow small minimum starting account sizes. While itís prudent to
start small, itís necessary to have sufficient funds to cover more than the
expected largest drawdown from your trading system. This is where a good,
detailed analysis of your trading systemís performance is crucial in order to
understand the kind of losses you can expect when the system is in a so-called
drawdown period. Just like with small businesses, underfunding is one of largest
contributors to failure. If you donít have sufficient risk capital to adequately
fund your account, itís better to wait until you do than to risk trading an
Step 7. Simulated trading. Before putting real money at risk in the
markets, itís a good idea to take advantage of your trading platformís trading
simulator, if available. This kind of ďpaper tradingĒ will give you a good idea
of what to expect from your trading system in a real time (though simulated)
Step 8. Go live. If the simulated trading goes well, itís time to start
trading with real money. As mentioned above, itís prudent to start small in
order to limit your risk while you learn what to expect from the process. If
youíre automating the order execution, itís a good idea to follow the system at
least initially while it executes to make sure the automation is set up
correctly. While some traders no doubt use automated order execution to trade
their strategies while theyíre away from the computer, leaving a trading system
unmonitored can be risky. There is always a chance that something could go wrong
during the trading day that might require human intervention, such as a
disruption in internet connectivity.
Step 9. Monitor your trading. Because the financial markets are
constantly evolving, even the best trading systems eventually stop performing.
This means itís necessary to monitor your trading performance. For example, if
the drawdown in your account is larger than the maximum historical drawdown from
the trading system, it may be necessary to stop trading the strategy. In some
cases, an under-performing strategy can be modified to bring it back in line
with the market. In other cases, it may be better to switch to a different
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