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Committee: If the Chicago Cubs win, then go long corn the next day. If they lose, then go short. If they win both games of a doubleheader, then go long on corn and soybeans. If they lose both games, then go short on both. Close the positions at the end of the day. |
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Neal: That system would produce great results, and you know someone could sell it and call it a seasonal. . . . Okay, seriously, give us a quick-start version for evaluating a system. |
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Committee: First, if you can't get the maximum total drawdown and Sharpe Ratio on the system, then forget it. Second, use a system that works on a diversified portfolio of markets. I remember, when I got together with other system developers, how we all laughed at the single market systems that have 95% winning trades and made millions of dollars. We laugh because we know how to optimize a system that gives great historical results but is worthless in real-time trading. If it is a good system, it can trade many markets. Third, never buy a system that is a black box. A black box gives you trades but no rationale behind the trades. The investor should learn what works and what does not. If he knows the system, he can then either improve it or integrate it into other systems he's developing. |
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Notes from Neal: In trading Chicago style, every trader must have a system. It can be elaborate, computer-driven, or something as simple as getting the edge on customer orders. The discussion on risk should not deter people. If you are sincerely interested in how risk can torpedo your trading plan, I suggest the book Against the Gods by Peter Bernstein. I assign this book to many of the classes I teach. |
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Finally, keep in mind that if a system seems too good to be true, it most likely is. |
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