I was house keeping my thumb drive, and found this trading journal I wrote back in 03-August-2005 when I was still trading SIMSCI futures. I found it to be interesting and useful. A review of my old mistake and a reminder for myself.
Confession of system trader Review of a mistake
It is a tough process to develop a efficient trading system. It is tedious to run through backtesting year after year of historical data. However, I think it is the toughest job to follow your system. We like and good in defining rules. We know how important it is to have rules to get our life organized and avoid unnecessary risk or even damage. The problem is, we always find it hard to follow the rules. Trading is no different from real life.
Lets take a look at an example. My system generated a BUY signal for SIMSCI on 29/07/2005 after market closed at 276.9. The system was telling me put in a buy order at opening price + 2.2. So, the buy stop order should be 280.2. Well, now the evil is struggling. From 276.9 to 280.2, it is 3.3 away. Normal trading range of SIMSCI is 2.5, how is it going to fill my buy order? How about I buy during market open and do a day trading ,sell at any point higher if it is still lower than 280.2. I might earn some fast cash! That sounds cool, I need to develop a sub system within my system The result of follow the evils suggestion instead of following predetermined rules is destructive. Yes, 280.2 did not get filled, and the sub system bought in some contracts. At opening, follow the fluctuation of price, and guess what, I ended up with a small loss. The loss is small, it did not cause any damage, but it is totally avoidable. Building a Sub system within a system in this way is a fools game.
Why did the system issue a buy order at 280.2 which is out of normal daily trading range? What is the characteristics of the system? After thinking of this , I realized the mistakes I made. I have a set of parameters and checking to confirm market moves in the strength and the odds are with us to go higher if the setup price is triggered. These rules are tested. If market failed to reach the point, it is simply telling me, Hey,now it is not the time to get myself in the market. What I should really do is ,staying aside.
Market will open tomorrow, no point betting your hard earned cash without knowing that odds are actually not with you.