Papale on Trading Systems

By Steve Papale

Happy Memorial Day!  The unofficial beginning of summer is here.  Lots of cookouts and parades this weekend.  For many it means one important thing  – it ok to now wear white.   For me personally I tend to live dangerously when it comes to fashion and hence I have been seen in white as early as March and late as October.  But for the strict rules based fashion observer, it’s ok to bring out those white pants now.  Happy days.

Trading systems.  It seems like nearly every day I get an email promoting some sure fire way to make money trading from home in my underwear in only 10 minutes a day.  Now the idea of sitting around the house in my BVDs may sound appealing (although the others in my family may have another opinion) but easy sure fire systems are a  myth.  Trading is a tough business.  But the appeal of making a lot of money, having no boss and working fairly short hours is  a powerful hook.  Systems claiming they make outsized returns over many years feed into our desire to make money without actually having to put in the work to learn the business or take responsibility ourselves.

There are two main reasons why the vast majority of systems being sold underperform over time.  First, anyone who is really making good money rarely if ever shares his system with the public.  Most systems have a life cycle and the more people using it the faster any inefficiencies it is profiting from will get traded away.  This idea leads to the second reason for ultimate box system failure – eventually all systems fail.

Markets either identify the inefficiency (like what happened on the options exchange floors over time) and it gets removed or markets for whatever reason evolve and a particular system may no longer work.  For the uneducated system buyer he must always be on the lookout for the next bright shiny object (system).  Traders are better off in the long run spending the time and doing the heavy lifting of learning the concepts and developing the skills to trade and be able to think and trade for themselves.  This does not mean they need to reinvent the wheel, as there are some tried and true strategies that work over time, but it is important to understand the how and why trades perform and adjust if necessary.  It simply makes more sense to spend some time and get educated and then sift everything through the knowledge and experience accumulated.  You will be better off than chasing after the next new thing.

Comments are closed