Intermarket Trading Strategies

10

Trading System Design

Life can only be understood backwards but it must be lived forwards.

-Søren Kierkegaard

 

There are basically two ways to trade using technical analysis: discretionarily and systematically. Discretionary traders use technical indicators and their experience to make their trading decisions. System traders, on the other hand, rely on the trading signals automatically produced by computerized trading systems.

The disadvantages of discretionary trading are human emotions: fear and greed. When you are in a trade that seems to move against you, fear of loss and hope of recovery make it hard to cut your losses. Optimism keeps you in a losing trade, hoping that the price will eventually turn in your favor. On the other hand, when you are in a trade that starts to move to the upside, greed takes over and you take profits too early, missing the biggest part of the move.

Trading systems remove much of the emotion surrounding trading decisions, and can also save a lot of time.

But do they work?

Many people believe in the Efficient Market Hypothesis. The Efficient Market Hypothesis states that, at any given time, security prices fully reflect all available information. The implications of the Efficient Market Hypothesis are truly profound. But if markets are efficient and current prices fully reflect all information, then buying and selling securities in an attempt to outperform the market will effectively be a game of chance rather than skill.

This belief persists ...