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Finding a trading method


Try to find a trading method that will reflect your psychological bias towards trading. Not all traders have the patience to trade a computer system and watch the trades give back large amounts of open equity. Methods are quite different from systems, and it is important to understand the difference.

I first learned this fact many years ago when I was a consultant for a very large aero-space firm. They had both systems analysts and method analysts employed there, and they existed in two very different departments.

A system, according to the Thesaurus, is an arrangement, classification, combination, complex, conformity, coordination, entity, fixed order, ideology, integral, integrate, logical order, order, orderliness, organization, philosophy, red tape, regularity, rule, scheme, setup, structure, sum, theory, totality, utilidor.
A method, according to the Thesaurus, is an adjustment, approach, arrangement, channels, course, custom, design, disposal, disposition, fashion, form, formula, habit, line, manner, mechanism, method, mode, modus, modus operandi, new wrinkle, plan, practice, procedure, proceeding, process, program, receipt, recipe, red tape, ritual, rote, routine, rubric, rule, rut, schema, scheme, shortcut, style, system, tack, tactics, technic, technique, tenor, the book, usage, way, wise, wrinkle.

Notice, a system says nothing about a method, but a method can encompass a system. A method also involves tactics and technique. A method can include a plan and practice. It can work from a formula. It contains a program, and a procedure. And perhaps most important of all, a method allows for adjustment!
A method can include all aspects of a system, and a method is much broader than a system. That is why in our business we develop methods, not systems, and especially not mechanical trading systems.
Quite frankly, for those of you who were not in this business during the 1980s, the heyday of $3,000 magical black box systems seems to have run its course. Very few mechanical trading systems are around, and they are sold for the most part only to the unwary who don’t know any better. The problem is that there are still plenty of those poor victims around.

Some traders want methods with as little involvement as possible due to job-related responsibilities. Not all traders have the psychological traits suited to trading certain types of methods.
Handing your mechanical trading system or even your method over to your broker may be one of the ultimate follies. Your broker cannot perform brain surgery on your behalf, when thoughts of a trailing stop are performing brain surgery on you.

Giving your broker discretion to trade your account as he/she sees fit is like paying for someone else’s education. You will learn nothing from it other than how much money you have lost once your account is wiped out. Allowing anyone other than yourself to trade your account is the same as making an investment. If your money manager is good trader, then you are okay; you have made a good investment. But if your money manager is a wannabe-trader-broker, you are in trouble. This is also true for using a mechanical trading system – you are making an investment. The investment is made in the soundness of the logic behind the mechanical system.

Investing in a mechanical system or allowing your broker to trade your account at his/her own discretion is no different from investing in a commodity pool operator, a CTA, or a hedge fund. You are no longer in control of the trading. You have become an investor with whomever or whatever is in control of the trading. In that case, you had better be sure you know the real trading results of what it is you are investing in.
Thanks for posting here Joe. Your contribution to the world of trading is legendary, and I personally appreciate your efforts.
If ya'll haven't yet, google the "Ross Hook", and "The Law of Charts".
You'll be glad you did.