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How Difficult is it to build a Winning Trading System? (Part I)

an while learnin
«Γηράσκω αεί διδασκόμενος»- «Geirásko aeí didaskómenos»: transl. 

“I lean while learning”

Socrates, 400 BC.

Today’s post will be the first part of a series of posts devoted to how someone could build a profitable trading system or -if you prefer- “strategy”. What is the “in’s and outs” of the process which could lead to the creation of an algorithmic automated architecture (aka “Robot”) that in its turn could lead to eternal riches and not only the monetary ones? You can live and trade from wherever you want (if the place has an internet connection available), whenever you want, make enough money for a quality life, while you don’t need to answer to anybody. The only “Boss” you will ever face is you. Yourself. But that’s the most difficult part…


The best side of profitable trading is that it can be considered as the “last bastion of freedom” as Dr. Alexander Elder wrote in his famous book “Trading for a Living” almost 2 decades ago. The worst side of trading, in general, is that when you trade proprietary (trading only for you with your capital) your boss is yourself. Either profitable or un-profitable, this business is a very difficult endeavor for someone to handle, unless he was born with this natural talent of a “cold-blooded” character.

It can be easily understood from the above said, that it doesn’t matter how good and solid your algorithmic (or not) trading system is if you cannot let it run or you cannot endure its “bad” periods. For the people who read these lines, and they are new to the world of trading and financial markets in general, please do not think that to be a trader you need to be a rocket scientist. Cause many scientists believed that, and guess what? They were the most unsuccessful traders of all time. People with “mediocre” education, but good with numbers, good memorizing useful stuff, shrewd practical characters, no addictions involved, this kind of people tend to be the most successful traders. And that’s the absolute truth. On the other hand, scientists (mathematicians, physicists, ITs, engineers -but as it has been statistically proven- not medical doctors or MBAers), are the best creators of algorithmic trading strategies embodied in a software form. I said “creators” and not implementers or executioners.

Yet, let us proceed further by assuming that someone who wants to create a trading system will manage to surpass the psychological hurdles and has the right mindset for letting his algorithm run without any intervention. A person who has this iron-made discipline and endurance or a person who will create a system for other people and he will not be responsible for its implementation, surveillance, and execution. Now with the “psycho-analysis” out of the picture, how difficult is it to build his/her desired algorithm?

To answer the previous question, which is the title for this post, first, we need to define three things: a) Profitability, b) Risk, and c) Time. Our potential system creator needs to define them, also. So, how profitable is “profitable”? how much risk he can take to reach this profitability and finally in how much time? We didn’t forget, of course, the capital problem. How much money he will need to stake to be able to achieve the a), b) and c)?

I have seen many stellar trading strategies to “die” because of their creator’s inability to be properly capitalized for them or to be unrealistic about the ability of a great system to surpass the capital problem. There are strategies which could work with even $1,000 but at the same moment we shouldn’t expect with such kind of risk money, to be able to differentiate in many different instruments of a market, and without a doubt to even think to extend our system to another market, unless its divine…

If all the above said sounds trivial to you, I can assure you that are not. Retrospectively, we can all say that something sounds so intuitively logical that we shouldn’t even bother referring to it. But the keyword here is “retrospectively”: hindsight is the worst advisor of the future reality which expect us.

Proceeding even further, lets now suppose that we have everything in control: psychology, profit, and risk, time, and a proper capital at its place. Now what? How would someone start to construct a trading system that will be able to serve his predefined targets? According to my 20 years of experience which I (painfully) acquired from trading the financial markets, either discretionary or systematically, either manually or fully automated, one thing can make the real difference and that is simplicity. If someone already understands that the markets are moving and shaking because of the price-makers and not the price takers, and if this someone realizes that in every tick the price dynamically has potential infinite ways to change, since demand and supply which discover the price will eternally be in a dynamic equilibrium and not a static one; then he has the problem partially solved. The nature of markets and why and by whom they “move”, their structure, are indispensable notions for a trading strategy creator’s knowledge arsenal.

For example, if you do not understand why in the FX markets before the announcement of an interest rate decision accompanied by its reasoning from the central bankers, is ready to explode towards either direction (“north” or south”), then please do not even bother to create a trading system. Some hard type of scientists would disagree with this opinion of mine, as I’d disagreed myself 15 years ago, but everything is not only pure past data analysis. It’s like we have a chef that never tasted the food, or he doesn’t know why salt could be annoying sometimes, or worse he doesn’t know why we usually cook in the kitchen.

Interest rates, aka “the cost of having money sitting in your pockets, in a certain form” is the main ingredient that could affect in any period the value of a currency in terms of another one. So, the price of an exchange rate. Why would someone hold euros against dollars, if a dollar deposit gives more return? Or why would someone sell the Eurodollar exchange rate, if he expects that the money supply from the FED to be vast? (the modern words for that is “quantitative easing”).

Anyway, I guess I made my case clear by now. To work in a certain environment, we need to know and understand the rules that govern it. It sounds-again-so trivial, yet again I am telling you it is not. I have met many “traders want to be” that they didn’t even understand why the interest rates decisions or the Non-farm payrolls announcements play such an important role in price direction and volatility.

Finalizing this Part I, about how difficult or not is to create a profitable trading system, I firmly believe that without basic knowledge of what we -really want and if that we have the means to achieve it, is the first and most important step of thinking about creating such a strategy. Also, without knowledge of the basic characteristics of the markets that we intend to trade our system, I wouldn’t say that someone has a chance of succeeding in this endeavor. But we just “touched” the surface, therefore, more to come soon.

I wish you a good weekend for everyone.

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