Here’s Some Solid Advice On Systems Trading

August 25, 2004
Chris Curran

Stock index futures opened Tuesdayâ€™s session with
upside gaps after crude prices took a tumble on news that Iraq would
resume oil exports.Â An opening price fade against the rising TICK with a
resistance zone overhead made up of R1, the overnight Globex high, a 60-min
trend line, and Monday’s session high, gave good reward/risk shorts in the ES.Â
The trend morning gave way to a lunchtime counter-move, and a choppy afternoon
move down again.Â Some short-covering the last hour ahead of Wednesday’s reports
was just enough to squeak out a gain for the day.

The
September SP 500 futures closed out Tuesdayâ€™s session with a gain of +1.25
points, while the Dow futures added +26 points.Â Looking at the daily chart, the
ES posted a hanging man just under its 50% Fib retracement of the June/August
down move at 1103, with support now at its 20-day and 10-day MAs in the 1086-84
area.Â On an intraday basis, 60-min and 30-min simple trend lines continue to
work well as both support and resistance. The YM reversed off of its 50-day MA
and 50% Fib retracement of the June/August down move, while the ER2 continues to
consolidate just above its 38% Fib retracement of the July/August down move.

Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â

September
bonds (ZB)
continue to be pressured by weakness in the energy complex and tested the
previous reaction low at 110.02 before a short-covering bounce into the close
tempered the day’s losses. The Semiconductor Index (SOX) reversed off of
Monday’s gravestone to post a bearish engulfing line, but was able to hold its
10-day MA support.Â

Tuesday
morning at 8:30 ET gives us the July Durable Orders report, with an estimate for
a 1.0% increase.Â While the futures are having trouble extending last week’s
gains, they’re also limiting the downside, which is enabling them to “back and
fill,” and work off the short-term overbought condition.Â

Dealing With Drawdowns in YOUR System

I’m sure you have
heard of the fact that “your greatest drawdown is ahead of you” in any system of
trading. Thankfully, the balancer to this is that your greatest “draw-ups” are
also ahead of you. Whatever a person uses to cause them to enter a trade is a
system. Obviously, some systems better lend themselves to testing than others.
That doesn’t necessarily mean they are better because they’re easier to test.

Systems don’t care
at all if they’re in drawdown, or if they’re making new equity highs. Only the
people who choose to use them may care.

System trading is like a marriage, because a commitment is required despite the
“gotcha” moments. If you commit yourself to trading a system, then you
must trade the system. In my years of
trading and educating, I’ve seen the same scenario play out over and over
again.Â A trader tries a new method or system, scraps it after a few trades, and
jumps to the “next and newest best thing,” rather than molding that system to
fit his own parameters (risk tolerance, etc.) and making it his own.

^next^

Never decide to trade a system that you are not
willing to “trade through” with. If you don’t “trade through” to get to
the profits, then it’s simple.Â You will never have profits.

You are much better off
trading a simple system you absolutely can have confidence in, perhaps with
poorer trading statistics, than some elegant, supposedly high profit/no loss
system which doesn’t have the seasoning and foundation needed for absolute
confidence, either personally, mathematically, or both.