Question One: Does a good trading system necessarily have universality?
A superior trading system must and inevitably possesses universality across markets and cycles, but the premise is that the properties of the objects being compared must be consistent. For example, a system designed for gold, you can test whether it can make a profit on silver (with minor adjustments to the rules), but if you test it on the British pound, you basically cannot get the results you want, because the characteristics of price trends for different properties of objects can be vastly different. In the gold market, you can use trend-following and trailing stops, because the trends of commodities often have very good continuity, but in the foreign exchange market, the price fluctuations are too volatile, and using swing trading and profit-taking has an advantage.
Testing a system across multiple markets and cycles is a required course in designing the system. This step can reveal whether the system has been curve-fitted, whether it has a sufficiently large advantage, and whether it has shown the true laws of the market.
Question Two: Can a trading strategy fail? How do you know when the strategy fails? Sometimes it feels like a strategy has failed, but after a while, it performs well again. And sometimes it feels like it's just temporarily failed, but the reality is that it fails for a long time.
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A trading strategy can fail, and the failure is mainly due to two factors:
1. There has been a significant change in market characteristics.The existing system's advantages are not significant enough.
The judgment of system failure is relatively simple and crude, looking at the maximum number (amount) of consecutive losses (profits). If the actual consecutive loss count is less than the test, we should steadfastly implement the strategy. If the actual consecutive loss count is greater than the test, we should be vigilant about the possibility of system failure (false failure) and market changes.
Question 3: What factors affect the effectiveness of the strategy? Trend strategies may fail in volatile markets. Besides this factor, are there any other factors? Is it the volatility of the product?
The characteristics of the market, such as the gold commodity market, have been trend-oriented in the past 10 years, and trend systems will yield good results. However, if the market becomes volatile in the next 10 years, the revenue of the trend system will be greatly reduced.
Question 4: How to deal with strategy failure?First and foremost, the most important thing is to design a system with sufficient advantages, which is actually multi-system trading, multi-period trading, and multi-market trading.
Question Five: How do you view the strategy of your trading system becoming ineffective once the technical aspects are made public?
An ineffective system is destined to be ineffective. It is easy to find an excellent prototype of a system, but it is very difficult to find a system that is easy to use. The Turtle Trading System is one of the best trading systems in the world (excellent in both system principles and performance), and it has been publicized for more than a decade. However, there are very few people on the market who can make profits using this Turtle System prototype. It is not because the system has become ineffective, but because the profit distribution and maximum drawdown of the Turtle System do not match the trading background of most people. The disconnection between the system and the trading background leads to the system not bringing you the expected returns. Forced results are not sweet.
For medium and long-term systems like the Turtle Trading System, with drawdowns greater than 50% and drawdown times greater than half a year (sometimes even not making money for a whole year), they must not meet the trading background and profit needs of most small capital traders. The front line is too long, and most people will collapse halfway.
Any garbage rule will have dazzling results in a certain special historical period. When the future market state changes slightly (or the people entering the market change), if the system becomes a negative expectation, it can only indicate that the original system is not truly excellent. Such a system will never be our goal (the original system's advantages are too weak to be sustainable). An ineffective system is destined to be ineffective, not because the strategy is made public.Do you use different trading systems simultaneously in your trades, or do you have multiple trading systems?
Yes, a robust trader will inevitably take this path - using multiple trading systems makes the entire account capital curve smoother, the maximum drawdown smaller, and better cope with the complex future.
For most of the trading systems on the market today, they all adopt a "wait-and-see" approach - the market forms a structure that fits your trading system, and then you make a profit. The contradiction lies in the fact that we can only recognize the risks of the past, but we cannot predict the future. What if the future market often does not form a pattern that fits your trading system?
Such a rhetorical question gives us at least three insights:
1. Design a trading system that conforms to the fundamental operating structure of the market (for example, the market must move forward in an N-shaped structure).
2. Design a trading system that does not strongly rely on market conditions with long-term trends or long-term volatile market conditions (for example, if a trading system heavily relies on having several very long-term trends in a year, then once the future trends become fewer and shorter, the system's performance will plummet).
3. (The third point was not provided in the original text, so it cannot be translated.)Running Multiple Trading Systems Simultaneously
Operating multiple trading systems can reduce our reliance on specific chart patterns and particular market conditions, mitigating the drawbacks of a "waiting for the rabbit" approach. One can observe the historical returns of all trading systems at hand, which often exhibit a wave-like curve as illustrated in the figure below. When System A has poor returns in a certain year, System B may perform well, or vice versa. Alternatively, both System A and System B might have good returns in the same year. If two systems are used simultaneously, this can help to smooth out the capital curve, reduce the maximum drawdown, and diversify risks.
In fact, diversification can enhance the return of a system without proportionally increasing risk. This diversification is not only about using multiple trading systems but can also involve diversifying the types of traded assets (with low or no correlation among various assets) as well as diversifying the parameters within the same system.
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