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The Fairest of Them All
By Darren Merwitz | July 11, 2007
Does the holy grail of automated trading exist? The one system that, despite all, will profit in any market environment. Is it out there? Could it be that one small idea, so basic that most have overlooked it? Or maybe it is so complex, that it involves the use of neural networks, artificial intelligence and computing power so advanced that it has yet to be developed to even begin to sort through the chaos of the market that we trade in?
My thoughts? You’re over-thinking. There is no “one to rule them all”. It’s a myth, and anyone chasing that dream has a long, bitter road ahead of them. My opinion on the key to the market - understand your environment. Trade ranging strategies in ranging markets and trending strategies in trending markets. It is as simple as that.
Well, the practice is far harder than the preaching. So it’s not that easy. But identifying the environments in which a particular strategy does well is the most basic of points that I’ve seen so many strategy developers overlook. An example of this insanity is that they will take a great trending strategy, only to tweak and adjust it to try perform well in ranging markets as well. Resulting in it not working in any market!
The more fruitful direction is to recognize that strategy as one that does well in its chosen environment - trending - and to then concentrate on finding a good ranging system to diversify the results with.Â
Thus this “ultimate system” that everyone is looking for is not a system, but a portfolio. It’s a portfolio of not-so-perfect parts coming together to balance each other in the environments that each is designed to do it’s best in.
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Topics: Systems Trading Blog |