TRADING SYSTEMS

A Strategic Design Process
The System Behind The System
by Merlin Jeffries


Tired of finding systems that worked well in the past but are deficient in predicting the future?

Back when I was a novice system developer, I would get excited by every marble-smooth equity curve I stumbled upon. Incredible backtest results in hand, I would start trading those systems with real money, only to find they were big losers in real-time. What happened?

What happened is that the systems I was finding, while excellent at predicting the past, were deficient when it came to predicting the future. This variety of trading system was almost impossible for me to distinguish from the future-predicting kind; until, that is, I started following a process for developing my systems.

THE MEANS JUSTIFY THE END

In the world of system development, the means justify the end. We cannot judge a trading system based upon a backtest result (the end); we must instead consider how the backtest result was achieved (the means). The means, or the system behind the system, is a strategically designed process for developing trading systems, and it's a trader's main defense against being tricked into putting real money behind a hindsight-based system.
 

...Continued in the February issue of Technical Analysis of STOCKS & COMMODITIES


Excerpted from an article originally published in the February 2006 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2006, Technical Analysis, Inc.



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