So Close to Winning, Yet So Far

One of the great benefits of mechanical system trading is that emotion is supposedly taken out of trading. If you ever are unsure of what to do, the answer is simple – follow the system. Sounds easy, right? Well, system trading can be as tough as, or tougher than, any discretionary method out there. Here’s a personal example.

One of the systems I trade is based on seasonal tendencies for the agricultural, meats and softs markets. Looking back at historical data, I found certain tendencies of commodities during the year. This makes sense because of crop cycles, weather patterns, etc. So, I designed a mechanical system around this, with strict profit and stop targets.

The great thing about system trading is that all the rules are determined before trading starts. Emotions and stress are typically not present during system development, since the developer is dealing with numbers and rules, not physical dollars and cents. It is like studying for a test. The more you study beforehand, the easier it is come test (trading) time.

Recently, this system told me to go short wheat. I did. And when the position had a significant profit, I added to the position, per the historically tested rules. Follow the rules exactly – that is what system trading is all about. No emotion, or so I thought.

After a month or so, the system was getting close to exiting with a significant profit. On a Friday afternoon, right before the wheat market closed, the system was within $10 profit of exiting. $10 out of thousands of dollars in profit!

Surely, I thought, I should exit at this point, and not expose the position to whatever might occur over the weekend.

My stress level went through the roof. Should I just close the position, and ignore my established rules? After all, it was only $10, less than one tick on a wheat contract. “Close it and bank the profit,” a voice in my head said.

“No! Follow the system,” said another voice. “What if it is $100 short of your profit next time, will you exit early again? What about $500, $1000? Where does violating the rules stop?”

Eventually, I came to the conclusion that the system rules MUST be followed. Otherwise, I concluded, why even have a system?

The lesson: if you have a system you believe in, follow it exactly, but don’t expect it to take emotion out of trading. Systems trading helps with the emotions of trading, but you can’t eliminate them completely.

Postscript: Oh, by the way, I held on to the position for a few more days, per the system rules. I gained another $400 per contract by doing so. But the money was not the real victory here. Following the system was.

Leave a Reply

Your email address will not be published. Required fields are marked *