Most of us understand the basic construct of a trading system as an automated method of participating in the price movements of a singular or group of markets. They allow investors the benefits of market participation based on a set of rules. These avoid the emotional aspects of trading and the temptations to follow the daily news cycle (noise) and market “experts”.

Let’s review the genesis of trading system development. Systems can be comprised of simple entry and exit concepts to the more complex and dynamic. These concepts are back tested using quantifiable data to determine profitability and behavior. Some of the inputs considered developing systems are price, volume, technical and fundamental data, volatility, entry & exit logic, risk mitigation and more. Each developer is unique in their process, approach and philosophy regarding systems. For example, we use quantitative, technical, fundamental and behavioral as the foundation of our research. Remember the results are hypothetical and not a guarantee of future performance.

What to consider when selecting a system? We believe a system should be dynamic and adaptive. The markets are fluid and constantly changing based on a variety of factors from macro data to geo-political events. Your systems should have the flexibility to adapt as well. Also, pay attention to suggested minimum investment amounts. Some systems offer minimums which are too low when factoring in draw downs and margin requirements. As an investor or trader it matters because these are programs you should want to hold over a market cycle (2-4 years).

In conclusion, trading systems may be a strategic consideration whether your goals are an edge in an individual market like crude oil or as a compliment to ETF’s and mutual funds in your personal portfolio. Of course, there’s always a chance that the addition of a trading system may not enhance your portfolio and may increase the risk of future losses.

The content of this article is based upon the research and opinions of Robert Spears, Managing Partner,  Optimized Trading LLC. 

There is a risk of loss in trading futures. Futures trading is not suitable for all persons. While managed futures can help enhance returns and reduce risk, they can also result in further losses in a portfolio.

Studies conducted of manage futures as a whole may not be indicative of the performance of any individual CTA or CTA index.
A CTA index may not represent the entire universe of CTA’s, and in most cases, individuals cannot invest in these indices. The actual rates of CTA returns may be significantly different and more volatile than those of a CTA index.