What are the best trading systems?  No matter what type of security you decide to trade, I believe automated/mechanical trading systems are the best.

The more you can do to remove yourself from the process the better.  Remember, emotions cause you to lose money.  So the best way to remove them is to automate your system as much as possible.

Mechanical and Automated Systems

So what is an automated/mechanical trading system?  Let’s break it apart.  Mechanical trading systems are systems which have a definite set of rules that can be programmed into a number of different trading programs or even excel.   These rules are usually quantitative in nature.  Here is an example of a rule, buy when the close of the security is higher than the close of the security 20 trading days prior.  This is a rule that can be programmed using the price of the security.

Automated trading systems are just like mechanical trading systems.   They have quantitative rules that can be programmed.  The difference is an automated trading system actually does the trading for you through a chosen trading program and platform.  This completely takes the emotion out of trading but it also introduces another potential risk.  To get your system to be completely automated you have to have very defined risk controls because you are relying on your rules to signal your buys and sells.  So how do you create a failsafe if the market changes and causes your system to become obsolete?

To build the best trading system you have to create a system that has an edge on the market.  This edge could be a number of things.  It could be a paired trade where you are long a security and short a security to try to take advantage of an arbitrage play between the two.  The other idea is to create a trend following trading system that uses volatility to let you know when the trend changes.  The point is it takes work to find the best system.  Even when you find or build one that works great, you still have to continue to monitor it to make sure the market has not changed in a way that would affect your trading system negatively.

Creating Your System

Creating the best trading system is like writing a hit movie or song.  It does not happen all of the time. As you work toward building your system you will more than likely create a lot of mediocre systems and some terrible systems.   I believe if you focus on something long enough you will eventually read or see something that will turn into an idea or thought to help you create the best trading system.  The important thing is to keep trying and testing your systems until you create a hit!

Once you have built or bought the best trading system, then it is important for you to continue to innovate and create.  Most traders have several trading systems in order to smooth out their equity curve.  Once you get to this point it is important to create a system to help you allocate your capital between all of your different trading systems.  Making money is not easy but it sure is fun when you get to this point.