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Some thoughts on trading software, indicators and systems

Some thoughts on trading software, indicators and systems
 

I agree with the premise that software and indicators are tools. They need to be well-crafted, but their ultimate utility is only as good as the trader that uses them.

I would add that for these tools to work with optimal efficiency, the trader that wields them must be a mix of both scientist and artist because no set of rote signals ever rises to the level of 100% reliability. If it did, we would have the “Holy Grail” of trading. The absolute impossibility of 100% reliability is why I believe all trading “systems” will eventually fail.

Consider the following example. I use a series of color-coded indicators, two moving averages, and Wilder’s Parabolic SAR. Together they create an alignment of red, white and blue lines I refer to as “momentum modules.” In general, when the colors align from the bottom up, price is rising. When they align from the top down, price is dropping.

It is a Cosmic Truth of Trading that every good move will have a red, white and blue alignment. But alas, it is another Cosmic Truth of Trading that not every red, white and blue alignment will result in a good move.

Imagine a strong rally, followed by a brief pullback. During the rally, the bullish rw&b alignment will produce a profitable long trade. The pullback may create a temporary rw&b bearish alignment but be of insufficient magnitude and duration to provide a profitable short trade.

A good human trader would recognize the down move as a pullback in an uptrend and pass on the short trade. A computer system programmed to trade every rw&b alignment would make a profit on the rally then take a loss on the pullback. Does this mean the rw&b alignment technique does not work? No. It only means that the computer system could not and did not consider all the variables.

During the Gold Rush, the only people who made money consistently were the storekeepers selling the shovels. And, the only people who make money consistently from trading systems are the developers selling the systems. Real profits go to the self-sufficient traders who can use the tools with the proper blend of art and science.

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