Hey All, We are back on our systems kick this week. If you recall from our post a couple of weeks ago we have four parts to a system. They are as follows, first up is the reason we are trading in the first place, what is the end game or the goal of the system itself? I have heard this called the objectives of the system. This is a very important part of any system because you really need to know what you are trying to accomplish, otherwise, you are likely just throwing darts at the market and in my experience and estimation that is a recipe for trading disaster. The second part of any system is the processes or procedures for the system. These must include the market types that will be traded as well as contingency plans as well as actions for changing market conditions. Thirdly, the mechanics of the system, this would be when to employ the system as well as whatever parameters the system requires to run properly. Finally, the system needs checks and balances built into it to ensure that it runs well and can be validated should the markets change into another phase.
In this week’s blog, I want to concentrate on the first part of the system. The ultimate goal of the system. Asking ourselves what we want to achieve with the system is a good place to start? What are we trying to do? Is this a system that takes advantage of time decay? If so what is the timeframe that we will need to use to get the desired results? Maybe it’s a system that follows direction and that it needs clearly defined guidelines to account for changes in direction? This raises even more questions that we need to ask ourselves and ultimately answer before we employ that new system. These questions might be, what time frame am I using and is that direction that I am looking for continuing in other timeframes or is this strictly traded on a one-time frame basis? Also, will I use other time frame directions to give me a heads up on directional changes and how does this affect the overall performance of my system? These are just a small sample of the things that we need to do before deploying a new system. These questions need to be thought of before we even really decide step one of our system and that is our objectives or goals for the system we are looking at.
Let’s talk more about the objectives of that system we are looking at, it is not as simple as stating I want this or that and I am willing to give up this to get it. Most folks have a hard time getting their minds around the fact that in trading and investing you have to give something to get something but for the purposes of this blog I will assume you all have gotten the concept of give and take, down to a “t” and that you understand that trading is merely a game of give and take. I will give you a visual representation of that concept below and hopefully it will clearly illustrate my point.
Do you see the white line? That is an equity curve, it goes up and it goes down over and over again but overall the right-hand side is higher than the left-hand side which indicates this is a money-making curve. To achieve this money-making curve there were a lot of ups and downs to get there or give and take. Sometimes you take from the market and sometimes it takes from you.
The system that we are looking at has to have this in mind and we have to figure out where we want the white line to end up and this is our objectives or goals of the system. We also must understand that the ups and downs are part of the system and they need to be factored in when designing or employing any system. The purpose of all the questions above is to do one thing that will ensure system success from a long term perspective and that is clarity! We need to be super clear about the validity of our system and that all starts with where that white line is going to be at the end and how we are going to navigate the road to getting there.
So when we are starting down the system path the best thing we can do regardless of whether we are building the system or reviewing it to see if it fits for us is we need to start asking ourselves questions to get more intimate with the system we employ. This intimacy is what gives us the power to control the parts of the system and make it work for us. So, I have asked some sample questions from above and I would think that you could come up with many more for whatever system you are looking at? Just remember, the more clarity you have over the system the better chance of success you will have.
There is one other thing that can help with clarity and if you have not done it I would implore you to look into building a business plan around your system, this process will naturally bring out more questions and more clarity.
In next week’s blog, we will continue on the next step in the system’s journey and talk about the framework for a successful system.
Until then…..seek more clarity.