In broad terms, trading falls into one of two camps: A discretionary approach welcomes personal judgment in individual trading decisions. Alternatively, a systematic approach involves conceptualizing, defining, writing and testing rules for entering and exiting trades, then consistently trading by those rules going forward.
Discretionary traders argue that past data were molded by unique micro- and macroeconomic forces and rigid rules based on that data ignore the fluidity of the markets. Systematic traders counter that, with care, even new traders can write rules that are robust enough to accommodate unseen market scenarios.
Traders, particularly new traders who lack the experience of market moves and reactions, generally perform poorly when emotions come into play. If you agree and wish to take advantage of the consistency and emotional control that trading systems offer, then you have at least two choices: You can develop your own trading system or you can buy one from a third-party developer. The steps to building a viable trading system are beyond the scope of this article.
The most important reason to build your own trading system is you will have full knowledge of when, why and how it trades, Thachuk says. According to Gutmann, having built your own trading system, you also are more adept at modifying it when market conditions change. Of course, building a trading system has its drawbacks as well. Also, if you are going to build your own trading system, you do need some knowledge of how the markets work, and that takes time to learn as well.
Other arguments against building your own system are the cost of development software and data, as well as your own personal time and energy. In general, there are two types of pre-packaged, commercially available trading systems: When a trader buys an open-trading system, they can see the logic behind entry and exit orders. That is, once you purchase the system, you can examine why it trades.
In black-box systems, the logic is locked. A black-box system will simply read current market data and report buy and sell orders as they happen. King points to a number of reasons to build your own trading system: Short-term signals in E-minis, crude and gold. The age old question. A better measure of risk. How to trade forex binary options.
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