Why Develop My Own System? Isn't it Easier to Just Go Buy A System with Proven Results?

By Van Tharp

There are hundreds, if not thousands, of trading systems that work. But most people, after purchasing a pre-existing system, will not follow the system and trade it exactly as it was intended. Why not? Because the system doesn’t fit them or their style of trading.

One of the biggest secrets of successful trading is finding a trading system that fits you. In fact, Jack Schwager, after interviewing enough “market wizards” to write two books, concluded that the most important characteristic of all good traders was that they had found a system of methodology that was right for them.

When someone else develops a system for you, you don't know what biases they might have. Developing your own system allows for compatibility with your own beliefs, objectives, personality and edges.

Furthermore, most of the system development software for sale really encourages some of the trading biases that I see as detrimental to overall trading success.

For example, give a system developer enough leeway and that person will have a system that perfectly predicts the moves in the market and makes thousands of dollars on paper with certain historical markets. Most software allows people to optimize to their heart's content. Eventually, they will end up with a meaningless system that makes a fortune on the data from which it was obtained, but performs miserably in real trading.

Most system development software is designed because people want to know the perfect answer to the markets. They want to be able to predict the markets perfectly. As a result, you can buy software now for a few hundred dollars that will allow you to overlay numerous studies over past market data. Within a few minutes, you can begin to think that the markets are perfectly predictable. And that belief will stay with you until you attempt to trade the real market instead of the historically optimized market. Many trading accounts have plummeted from this very thinking. One “sure-thing” trade placed without proper position sizing can wipe some traders completely out of the game.

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You must concentrate on the most important task of system development. If you do it properly, it will take at least half of your time during the development process. When you learn what it is, you’ll say, "Of course, it’s important," but you’ll still probably spend very little time on it.

That critical task is developing sound objectives.

Jack Schwager, after writing two Market Wizard books, concluded that the most important characteristic of the top traders and investors he interviewed was that they had adopted a trading system to fit them. But to develop a system that fits you, you need to really think about what you want. There are at least 30 questions you need to address when you develop a trading system. It’s not a trivial task.

What is an objective?

Your objective is your goal, your target. It is the things that you want your system to accomplish.

Objectives set the roadmap for the entire system development process. How would one know how to get someplace if they didn’t know where they were going first? It is easy enough to see that if one trader had an objective such as “I want a system that trades long-term stocks, that requires my attention only once each week and makes 20% per year” compared to a trader’s objectives of “I want to actively trade my mother’s retirement account for four hours each day, without holding overnight positions” – two completely different systems would be required. The objectives or goals are very different. There are endless configurations of objectives. The point is, you need to specifically know what it is that you are trying to attain and only then can you develop a trading system that will help you attain it.

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The above is actually a marketing article to promote a course on developing your own trading system.

I think the general idea of setting your own system to suit your personality applies to investment in general. Basically, I view "system" as a set of criteria to be fulfilled before implementing a decision.

My previous posts on "Strategies for Defensive Investors" are essentially evaluating different "systems" for defensive investing (in Singapore market using STI ETF).

Besides Mr. Chen Yi's "Stock Selection Criteria", the SGDividends team has also identified a set of "Minimum Considerations" for a DIY Equity Investor". I find these interesting and useful resources for a beginner in investment to start with.

Do you know of other investment "systems" for value- or defensive investors?
Would appreciate if you care to share.



P/s: As for the bolded and underlined part in the above article "you need to really think about what you want", I really think it applies to LIFE actually.