Investment Systems

On the development of security investment rules

Often a set of investment rules will generate conflicting signals. For instance, it might call for an Enter Long trade on the same bar as an Enter Short trade. What is to be done in those cases? The governing directives are often called the Order of Execution. The Genetic System Search for Technical Analysis program, Equis MetaStock and others use the following rules to resolve any signal conflicts.

If you use the MetaStock Enhanced System Tester (EST) in the development of your trading system, it is important to verify the results. Some configurations, for instance, may result in simulated trades that you would never execute. The EST may both buy and sell a stock at the same time. That results in two additional brokerage fees with no possibility of profit.

It's important to construct a set of investment rules that generate signals in which you are confident. Imagine that you're using a system in live trading and the last five trades have been losers. Your trading capital is depleted and your confidence shaken. Are you going to make the next trade without question?

Consider the case of a huge drawdown during an open trade. Your profit has turned into a loss. Will you stay with the current rules or jump ship? Can you hold on for a vague promise of a profitable outcome in a few days or weeks? That's unlikely.

Tempus Fugit

The investment market moves continuously. Opportunities for profit appear regularly. If you're spending time developing a trading system, you are missing these prospects. What is your development time costing you?

Take Advantage of the Available Tools

Modern techniques such as the algorithms employed in Genetic System Search for Technical Analysis shorten the path to active trading. Take advantage of the tools available. You don't even have to use the fastest machine with four monitors arrayed in front of you. Leverage the power of the computer.