A while ago I came to the conclusion that I’m not very good at making investment decisions. Clearly I’m not the only one. To take just one recent example from January 2015, when the Swiss central bank removed the peg of the Swiss franc against the euro tens of thousands of amateur traders were wiped out, and even several sophisticated hedge funds had to close.
We now have decades of research from behavioural finance experts, like Nobel prize winner Daniel Kahneman, explaining why people make bad investment decisions. Although human brains are very good at analysing complex information, they are too easily overwhelmed by emotion, resulting in irrationality.
I decided the answer was to completely systematise my investing and trading. By following a set of simple rules I would seek to avoid my own greed and fear, which were pushing me into making bad decisions.
Fortunately I had an ace up my sleeve. For over seven years I worked for one of the world’s largest systematic hedge funds: AHL. By the time I left in 2013 I was managing their multi-billion dollar fixed income portfolio. Designing trading systems was something I had a lot of practice at.
Unfortunately I wasn’t allowed to take a copy of AHL’s software with me! I had to start from scratch. After months of research I had a system that I was happy with. I personally think almost anyone would benefit from following my example and using a system –traders and investors; amateurs and professionals.
Although books on trading system aren’t exactly thin on the ground, some of them have quite serious flaws. They encourage you to take too much risk, or trade too frequently. Even in a good book it’s unlikely that the system will be exactly right for you. It might not cover your preferred asset class, or the trading style that suits you.
So I’ve written a new book – Systematic Trading: A unique new method for designing trading and investing systems – to show you how to design your own system, to suit your specific needs.
The book first covers the theory, including behavioural finance, behind designing trading systems. I then explain how to use key techniques safely; and I introduce simple robust methods which avoid the need for complex and dangerous alternatives. The book incorporates a complete and extendable framework for the creation of systems for trading and investing.
I show how the framework can be adapted for three different types of trader and investor:
- Semi-automatic traders continue to predict price movements themselves, but within a systematic framework for managing their positions.
- Asset allocating investors use systematic methods to build long-term diversified portfolios.
- Finally staunch systems traders exclusively use systematic rules to make all their trading decisions.
I’m not offering a magic rule that will guarantee you profits: I don’t believe there is one. But reading Systematic Trading should help you to avoid the most common mistakes that system designers make: over complicating, over fitting, over trading and over betting.
Systematic Trading: A unique new method for designing trading and investing systems, will be published by Harriman House in September 2015.