Meet The Systems Trader
Greetings! I’d like to take this opportunity to introduce myself. My name
is Dean Hoffman, and I have been involved with the futures industry for over
15 years now. I started in the late 80’s as a commodity broker and eventually
ended up running my own brokerage firm in the heart of Chicago’s financial
district. Unfortunately, during my many years of dealing with customer accounts,
I witnessed the vast majority of futures traders losing money. Some have put
the figure as high as 95% and my experience would tend to confirm this. Because
my livelihood was very tied into the success that my clients experienced, I
decided there must be a better way.
As a result, in the early 90’s I began
what ended up being a full-blown 10-year research project into commodity trading
systems. Over the years, I completely immersed myself in every aspect of system
trading and development. I started out by developing simple single market-based
systems and then evolved to more complex portfolio-based systems and system
combinations. I tested much of what was available in the public domain (without
satisfaction) and then created my own proprietary indicators and methods. I
also did extensive research into the critical areas of money management and
position sizing.
If you think about it, the Turtles were the first mechanical system traders.
For those who may not know of them, they were a small group of individuals
that were trained by legendary traders Richard Dennis and William Eckhardt.
Dennis and Eckhardt had a bet about whether or not they could train somebody
to trade just as successfully as they could. Keep in mind, Dennis is reported
to have made several hundred million dollars starting with less than a few
thousand dollars. Furthermore, what the Turtles were taught was a very specific
mechanical trading system, developed by Dennis and Eckhardt.
The experiment was an overwhelming success! Many of the Turtles went on to
become some of the world’s most successful and sought-after traders. In fact,
many of them are now in the public spotlight far more than their mentors, Dennis
and Eckhardt. In the minds of many, this proved that it is possible to develop
and be successful with mechanical futures trading systems.
In the weeks
and months to come, I will be presenting valuable information about system
design and related concepts. Here are just a few things we’ll be looking into:
- Optimization and its
potential pitfalls. Much has already been written about the dangers of curve
fitting. Yet, many traders who develop their own systems continue to make
the same mistakes, repeatedly. I will explain to you what the most common
errors are, and how to properly use historical data in order to develop
robust systems with long-term viability. - Position sizing. This
is a hugely under-explored area for system traders. I will show you how to
gain an edge by using systems that adjust position size, based upon key
variables. - Money management.
Trading systems are much more than entries, stops and exits. To be viable,
they must fully integrate money management and trade management through every
phase of the trading process. I will show you how to do this. - Creating trading
systems for different time frames. Here, I will discuss what kinds of
considerations must be factored into intraday vs. position trading systems. - What are the best
tools to use to develop and test systems? I’ll show you exactly what to look
for and what I see missing in some of the most popular platforms. - Worst-case analysis.
One of the most powerful yet least known ways of developing a strong system is to
test it on the basis of its worst drawdown period. This is the only way to
scientifically judge the real performance of a trading system. - System combinations.
Hedge fund managers use multiple systems that are uncorrelated. I’ll
demonstrate what this means and why this is important for private individual
traders to implement.
In addition, I want to
invite you to email me directly and ask me any questions you like on trading
system development. I will do my very best to help you build your knowledge and
improve your results.
Thank you for taking the
time to get introduced to both the new column and myself. I hope you will find
it extremely informative and interesting. Feel free to start asking questions
right away. E-mail me at deanh@tradingmarkets.com.