Robust Trading Systems
"Sometimes Referred to
Robust systems are sturdy and able to withstand all that the markets can throw at them without collapsing in ruin.
At least that is the concept and the ideal that traders would like to be able to achieve.
But can robust systems be created – and if so, how?
Robust systems (also known as bulletproof systems) can certainly be created and there are two main approaches from which robustness may be achieved – diversity and simplicity.
If you diversify your portfolio by trading a wider range of markets, you will be spreading your risk and that is a robust strategy. But perhaps without being conscious of it, you are doing much more to increase the robustness of your system.
The greater number of markets you trade, the greater the variety of activity your system will encounter and the greater will be the chance that at any particular time, something will be going on somewhere in your markets.
With more markets, you will make more trades, though position sizes may have to be smaller on average depending on your financial resources. But you will get more ‘trade outcomes’ and this is important from a money management point of view and may well have a disproportionately beneficial effect on your results.
(The way this money management effect works is difficult to explain without going into greater detail than is possible here. A fuller explanation is provided in The Ten Golden Rules of the Winning Traders eBook).
Another way to diversify, is to add another system – so that you are trading say, two different systems concurrently. If the two systems dovetail with each other by trading markets in different ways, then this will add to the robustness of your trading and produce benefits similar to those gained by trading a wider range of markets.
Of course, both of these diversification strategies can be operated together.
Keeping your system as simple as possible will greatly improve its robustness. In practice, this means having the fewest number of rules and applying them generally over all markets that will be traded.
By reducing discrimination in this way, the system rules will be applied in a greater variety of circumstances and are less likely to be ‘surprised’ by events. At the same time, the system will be less reliant on particular situations for its success.
System traders always test their systems thoroughly with historical prices but however well this is carried out, there is always great scope for markets to behave differently in the future to the way they have in the past.
In live trading, systems with complex rules will be confronted with virtually unlimited alternatives due to market variability whereas those using simple rules are unlikely to encounter much that ‘has not been seen before’.
Experienced system traders will have robust systems with simple rules.
Copyright David Bromley 2006
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