M Y-B E G I N N I N G S-W I T H-S Y S T E M S

I remember one of the first systems I used to trade. It was a system that a friend
told me he got from a friend in Chicago, whose friend traded with Ed Seykota. Ed
Seykota was one of the traders mentioned In Jack Schwager’s Market Wizards,
which was one of the most popular trading books back when I started trading.
Anyway, this system was just hearsay handed down through a chain of people.
It now reminds me of playing a game of telephone as a kid where one person
starts by saying, “My mother has very nice hair,” and by the 50th person it comes
out as, “Your father’s feet smell like a chair.”
Maybe at one point it was a valid system if it actually did come from Ed
Seykota, but I have no idea if it did. And even if it did, how many alterations
did it go through before it got to me? Maybe I only got part of the system and
something was left out. The system was a reversal system that did have merits,
but I never really bothered to test it over an extended period of time. I thought
if it came from a market wizard it must be good. I didn’t make money trading
this system, but at least I had something to work with when I started making
my own systems. I was still a novice trader and had few tools, but this system
helped me a lot—not in my actual trading, but it helped me learn what a system
should be. It took over a year for me to adapt it with tools I learned to use and
to make it my own and back test it over a decent period of time. There is no way
I could have done it during my first year of trading; I just didn’t know enough
to have done so. But once I learned how markets react and how to manage
my money and how to use trend lines and moving averages and stochastics
and read hundreds of different trading strategies, I was able to put some solid
rules together to make this and a few other systems work for me. I’m sure that
if Ed Seykota had gotten hold of my system he probably couldn’t have made money with it-–unless of course he dissected it and made some changes to it
and reverted it back to his system.

So relax. Don’t go crazy all at once. Trading is a lot of trial and error.
It will take you time to get things right, so be patient and don’t blow your
wad all too quickly. It really is important to get past the first year or two
and still have money to trade with as you get better.

The Importance of Back Testing

I’m not going to spend too much time in this book talking about how to
back test, but you need to know how important it is. Whenever you buy,
borrow, or make a system or have a trading idea you think may work,
back test it before you risk your money. No matter what you may think
the results will be, check it for yourself. If you have one of the better charting
software programs, like TradeStation, you can easily test your systems
with it. Even though the TradeStation programming language is called Easy
Language it will take you a bit of time to learn how to write your systems,
but once you get the hang of it, it’s not too hard at all. I recommend taking
a few systems out of trading magazines and entering them into TradeStation
to get the hang of how to write and program a system. Take the time
to learn it, as it will definitely pay off later.