Pitfalls of Trading Systems and Technical Analysis Indicators!Trading systems are supposed to be objective and mechanical. They take the intuition out of trading. Buy when the system tells you to and sell when the system tells you to.
The problem is that there are not a lot of good trading systems out there.
However, some are created for certain institutions to take advantage of arbitrage opportunities, or tricky derivative strategies. They are not at all suitable for the average trader.
Traders tend to lose objectivity when using technical analysis indicators. The trader is not able to remain objective and the subjectivity of using the indicator overwhelms him.
I think it has to do with a compulsion many traders feel to have to trade. They then tend to subvert their indicators by trading when the signal is not entirely clear.
Traders have a tendency to test their trading systems and technical analysis indicators on an insufficient amount of data. Analysts need to test trading systems and technical analysis indicators on a wide array of data in different types of trading markets.
Additionally, many traders and analysts don't forward test their trading systems and technical analysis indicators in real time.
They rush to trade based on insufficient back-testing and forward-testing. Thus, they are trading on not a sound, valid basis.
Many traders fail to incorporate sound risk management techniques in their trading systems. Additionally, many traders fail to incorporate stop loss orders with their initial orders when using technical analysis indicators only.
Traders also tend to over-optimize their trading systems. They start asking the what-if question and back-test the trading system with different parameters.
They are always trying to trade with the parameters which generate the highest amount of wins. However, in real time these over-optimized systems rarely perform well.
Another trap traders fall into is to use too many technical analysis indicators. Find the few that work consistently well for you and go with them. I find the time tested technical analysis indicators to be the best.
Conclusions:
I have always considered speculative trading more of an art than a science.
The best traders I've ever seen use technical analysis indicators and intuition.
However, despite their intuition, one thing common to all of them is that whether they can articulate them or not, they all have a set of well defined rules they trade by.
If you are considering buying technical analysis software be very skeptical of systems that advertise tremendous results. They have probably been over-optimized to show excellent back-tested results and won"t work when you try to use them.
Of course the company will have a whole list of reasons why it isn't working well at that particular point in time!
However, excuses don't do you any good when you're losing your hard earned money!
Last, what works for one trader may not work for another trader ...
If it works for you -- that's all that counts!
