Trading Systems - What and Why?

Trading systems are generally computer software programs which issue buy and sell signals based upon price, volume or other empirical data. By analyzing real-time price data and comparing such data to pre-set pattern recognition inputs, or by running said data thru mathematical algorithms generally compiled by the system provider himself, trading signals are generated and then run through an auto-execute applet in order to effect the trades thus indicated.

Because such systems are computer based, they are not liable to human input and thus don't carry the tendency to second guess the pre-set parameters, hesitate to execute indicated trades, or simply miss signals because the trader is distracted for any reason.

They are thus incapable of straying from the trading discipline set into the system at its outset.

In short, they are significantly less liable to the human frailty inherent in any trader's psyche.

Because computers aren't subject to distraction or fatigue or hesitation, they offer a more disciplined approach to trading volatile markets while also possessing the added advantage they are able to make trading decisions 24 hours per day, seven days per week often for weeks on end. Additionally, because the developmental stage is where the decision-making process is defined, tested and refined, subsequent decisions are made with split-second efficiency far beyond the capability of any human trader.

This defining, testing and refining process often goes on for years and in some cases even decades to come up with the end result. That being said, hypothetical results do offer investors the ability to evaluate key performance statistics such as:

  • Current year-to-date return
  • Average return
  • Average winning trade
  • Maximum drawdown
  • Average drawdown
  • Average losing trade
Systems Trading Products

As with any investment, there are costs associated with participation in Trading Systems.


One of the prime benefits of computerized trading is the sheer speed with which trading decisions and order execution can be made. This makes such systems particularly adept for day-trading use although some position trading (generally accepted to mean overnight trades) is frequently offered as well.

Remember that futures contracts often carry no greater overall price volatility than equities trading, however the leverage available in futures versus that available in equities can exaggerate that volatility many times over.

Cognizant of that available volatility, many trading systems are designed to trade with extreme frequency, hoping to capture profits through a series of small price movements executed many times during any given trading session.

In fact, many prefer to avoid the risk associated with holding positions overnight.

The frequency of trading can generate high commission costs which must be balanced against the benefit of limited overnight risk exposure as well as the expected profitability of the system itself.


Pay close attention to the equity requirements of each system under consideration. The system designers themselves know best, the risk/reward parameters built into their system(s) and generally have formulated their suggested account minimums to take into consideration the almost inevitable drawdowns inherent in trading futures.

Equity permitting, systems investors should seriously consider the benefit of diversification provided by allocating funds across multiple systems or at least non-correlated markets traded within the same system. Diversification, while no guarantee of success, does spread the risk inherent in any system.

Trading Systems by their very nature are created by applying specific algorithms to historical price data during the testing phase. The performance numbers thus generated are designated as "Hypothetical" such results are accumulated by back-testing the strategies on past market data, and it is important to note that hypothetical results have inherent limitations in that they are prepared with the benefit of hindsight and lack the impact of true financial risk.