What is System Trading?

Another instance would be someone who hears the news and wants to buy or sell the stock. That's fundamental trading. In either instance the trader decides to buy or sell based on fundamental strategies, technical indicators and usually a combination of both. That fine because everyone has their own trading style. System trading is a different animal.

Now let's take the indicator off. Here is plain bare price chart data. What system trading does is take the data that is in front of you. Then a computerized program, like the one I have written in easy language in Tradestation, collects this data, processes it and creates buy and sell points based on probability of historical price action, based on pattern recognition on a couple of indicators. It also decide when to get out based on targets, based on reversals, based on equity out function and based on different price targets and day loss and so forth.

Now let's add the Universal system to the charts and see. What you see here is a buy point and sell point, a buy point and a sell point. If you now look at the chart you'll see a blue arrow pointing up, that's a buy signal, a red arrow point down is a sell signal. Any time you see a white arrow, it is an exit. Everything you see is generated by a computerized program, no one has to push a button to do this other than turn the system on. I often say the automated trading is not necessary unattended. I almost insist that anyone trading an automated system stay in front of a computer to make sure everything happens properly. Basically we have to make sure that the computer is up, the internet is on and that the trades that are generated are taken in your actual account. It not a big deal, it is just a good idea to be in front of you computer to watch this.

Systems can be applied to any market and any time frame. The nice thing about system trading is that you can look to see what was done historically as well as you can see what the trades would have been if you had taken them automatically in your account. To do this we can take a look at the strategy performance report and that show us 10 days between 6/15/08 and 6/25/08 that contract would have a net profit of $3487 on 28 trades, that's 67% profitable and drawdown was around $1200. You can see what the periodic return was each day and you also graph these returns. Nice thing about this is if you don't like what it is doing you can go and change some of the system inputs. All you have to do is right click on the chart, go to format strategies, open up the inputs and you can change the trading patterns, you can change anything you want. There is a manual and server video that accompany the system.

So basically discretionary trading is done when a trader decides to buy or sell depending on his or her interpretation of technical indicator or fundamentals. System trading is done automatically by a computer, processing the raw data from the market and comparing what the computer is seeing in real time to what it has noticed historically and placing trades automatically. All the trading is done, all the calculations are done, all the trades are places and received, cleared and filled an put into your account automatically. All you have to do is stay out of the way and make sure that the system is up and internet connection is live and so on. That is basically what system trading is and also describes the differences between system trading and is discretionary trading.