Robert Carver - Systematic Trading - A unique new method for designing trading and investing systems

I am very bad at making financial decisions. Like most people I find it difficult to manage my investments without becoming emotional and behaving irrationally. This is deeply irritating as I consider myself to be very knowledgeable about finance. Ive voraciously read the academic literature, done my own detailed research, spent 20 years investing my own money and nearly a decade managing funds for large institutions.

So in theory I know what Im doing. In practice when faced with a decision to buy or sell a stock things go wrong. Fear and greed wash through my mind, clouding my judgment. Even if Ive spent weeks researching a company its still hard to click the trade button on my brokers website. I have to stop myself buying or selling on a whim, based on nothing more than random newspaper articles or an anonymous bloggers opinion. But then, like you, Im only human.

Fortunately there is a solution. The answer is to fully, or partly, systematise your financial decision making. Creating a trading system removes the emotion and makes it easier to commit to a consistent strategy.

I spent many years managing a large portfolio of trading strategies for a systematic hedge fund. Unfortunately I didnt have the opportunity to develop and trade systems to look after my personal portfolio. But after leaving the industry Ive been able to make my own trading process entirely systematic, resulting in significantly better performance.

There are many authors and websites offering trading systems. But many of these systems require subjective interpretation, so they are not actually systematic. Some are even downright dangerous, trading too quickly and expensively, and in excessive size. They present you with a single one size fits all system which wont suit everybody. I will explain how to develop your own trading system, for your own needs, and which should not be excessively dangerous or costly to operate.

Ive found systematic investing to be more profitable, and to require less time and effort. This book should help you to reap similar benefits.

This book is intended for everyone who wishes to systematise their financial decision making, either completely or to some degree.

Most people would describe themselves as traders or investors, although there are no consistently accepted definitions of either group. What I have to say is applicable to both kinds of readers so I use the terms trading and investing interchangeably; the use of one usually implies the other is included.

This book will be useful to amateurs individual investors trading their own money and to market professionals who invest on behalf of others. The term amateur is not intended to be patronising. It means only that you are not getting paid to manage money and is no reflection on your level of skill.

This is not intended to be a parochial book solely for UK or US investors and I use examples from a range of countries. Many books are written specifically for particular asset markets. My aim is to provide a general framework that will suit traders of every asset. I use specific examples from the equity, bond, foreign exchange and commodity markets. These are traded with spread bets, exchange traded funds and futures. But I do not explain the mechanics of trading in detail. If you are not familiar with a particular market you should consult other books or websites before designing your trading system.

It might surprise you, but this book will also be useful for those who are sceptical of computers entirely replacing human judgment. This is because there are several parts to a complete trading system. Trading rules provide a prediction on whether something will go up or down in price. These can be purely systematic, or based on human discretion. But it is equally important to have a good framework of position and risk management. I believe that a systematic framework should be used by all traders and investors for position and risk management, even if the adoption of fully systematic rules is not desirable.

If you can beat simple rules when it comes to predicting prices, I show you how to use your opinions in a systematic framework to make the best use of your talents. Alternatively you might feel it is unlikely that anyone, man or machine, can predict the markets. In this case, the same framework can be used to construct the best portfolio consistent with that pessimistic view.

Throughout this book I focus on three typical groups of systematic traders and investors. Dont panic if you dont fit neatly into any of these categories. Ive chosen them because between them they illustrate the most important issues which face all potential systematic traders and investors.

In the final part of the book I discuss how to create a system tailored for each of these audiences. Before then, each time you see one or more of these heading boxes it indicates that the material in that section of the book is aimed mainly at the relevant group and is optional for others.