I suppose it’s a common refrain among newer systematic traders (i.e. those who prefer to have a programmed computer trade on their behalf): when is it OK to override the system I created?
This is particularly on my mind this week, as the volatility of global markets in the first few trading days of 2015 has been a mix of good and bad for my trading system:
- The good: higher volatility, combined with strong trends (I’m looking at you, oil and euro) has meant several winning positions for my relatively simple momentum system.
- The bad: despite some decent trends, there have been pretty good reactions/whipsaws in other markets (including equities and bonds).
So here’s my thought process, in the heat of battle, as it were:
- Rational side: I’ve created a robust system, without fiddling too much with parameters (learning lessons from others). It works in backtest, and has worked since live trading. Just keep away from it.
- Emotional side: I was up $xx in my S&P position, but am now up 75% of $xx. The trend *looks* like it’s reversing. Better to get out now, rather than await the inevitable close by the system.
- Result: A few good discretionary closes, saving a decent chunk of accumulated gains/avoiding loss. Set against that, a few other discretionary closes led to a bad outcome – fear of missing out.
- Say I closed a trade in oil, just to see the price continue its downward trajectory.
- The system wanted to stay short, but I exited early.
- I get mad at my decision, so get back short at a lower price.
- The oil price finally does reverse, vindicating my earlier decision to close out early. But now I’m stuck with a position (that the system still wants, btw) that I don’t want.
- I close this second, losing trade, again mad at myself for the whole scenario.
- Overall, these losses offset a decent chunk of the profits saved by discretionary exits.
What to do. I guess it’s back to work on my system’s exit logic – hopefully my idea for closing out earlier doesn’t completely screw up the system’s profitability. Regardless, I’ll learn more.