trading systems failTrading systems fail all the time

I’d spent hours, days, weeks, months.

Testing, optimising, fine-tuning.

I’d read books, journals, blogs, studied the market, stared at quote screens and charts till my eyes were red and I could see them repeating in my sleep.

I ate, slept and breathed the markets.

I hated the weekends. Whenever Saturday came all I wanted was for Monday to come round again so that the markets would open.

Finally I had a strategy I was happy with. It was going to have a win rate of 70% and a risk reward of 1:3. It was unstoppable, unbreakable.

All I had to do was hit go and we’d be up and running, bringing in profits no matter the time of day, no matter the scenario.

The system had been back-tested on over 60 years of data, all the way back to the 1950’s.

It was profitable in the 70’s when inflation was running riot, it survived the 1987 crash, it made a packet in the 90’s and it was still going strong through the dot-com bubble.


I pushed ‘GO’ and immediately we were in action. The system got to work scanning the markets for opportunities, picking the stocks that were trending, finding the ones that weren’t, and making money on both sides of the trade; long and short.

The system encountered it’s first losing trade within a few days. Within a couple of weeks the system was down -20%. But wait, the run of losing trades was much larger than had ever been encountered through 60 years of back-testing.

Could it be that the system was broken already? Could it be this system was one of those trading systems that never work?

6 Trading Systems That Always Fail

#1. Day Trading Systems

Not only do day trading systems always fail. They hardly ever work to start with.

The day trading systems that you find for sale on the Internet or in magazines are the worst. A particular trading system called ‘The quickest way to day trading profits”, may as well be called ”The quickest way to empty your bank account”.

The only day trading systems that work are the ones run by the machines at Goldman Sachs, and no one will be able to compete with them.

#2. Curve-fit Trading Systems

You will probably understand what the introduction to this article was all about. If you don’t and you’re trading a system you have a bit or work to do.

The trading system was curve-fit. It had been optimised and picked over thousands of different systems. It looked good on paper, it looked like it would profit in any market condition. It was the holy grail.

But it was all an illusion. There is no holy grail.

#3. Mean Reversion Trading Systems

No-one has ever made any real money with mean reversion systems. They go against how markets work and the whole philosophy is wrong. Mean reversion has led to more losses than any other strategy.

Developers love mean reversion because it tests their programming abilities and their ‘math’.

They’re always short-term in nature so they’re deemed less risky. But they’re anything but, because mean reversion systems increase risk as a market drops. That leads to blow ups, Victor Niederhoffer anyone?

The only traders to really make money in the markets take long term positions and follow long term trends. George Soros, Warren Buffett, David Harding, Paul Tudor Jones, Bruce Kovner, Carl Icahn; if a trade is going their way they don’t cut it because it’s back at the mean. They keep their money in so they can earn a bit more.

#4. Forex Trading Systems

Forex trading systems fail more often than most because the forex market is the most liquid market in the world. It’s highly competitive, efficient and very difficult to beat with trading systems alone.

That makes them near impossible for trading systems to make money in.

CTAs and trend following funds might be able to make money in currencies with their systems but that’s only because they’re diversified in many other futures markets such as commodities, stock indices and bonds.

If they concentrated on currencies alone, their returns would be minuscule at best.

#5. Technical Analysis Trading Systems

This may upset a few people but the truth is that technical analysis trading systems fail.

Take a look at the Forbes Rich List and count how many technical analysis traders are on there. (Hint: there aren’t any).

And even when a technical trading system does work for a time it will eventually stop working; since it won’t take long for machines to work out the trading system edge and price out the inefficiency.

But wait, I hear you ask! Doesn’t your course & book cover 20 technical trading systems?

Well yes, technically, it does. But firstly remember that these are system ideas.

Secondly, and more importantly, please realise these are not simply based on technical trading rules. Most of them are based on a philosophy that has been proven to work over many different markets: trend following. There’s a big difference.

They don’t rely on technical indicators to find profits. They use technical indicators to find long term trends.

In truth, the indicator is not what is important. The important thing is to find the trend.

The money isn’t in the rules per se, the money is in finding the trend and riding it.

And anyway, at least 5 systems on the course incorporate some element of fundamental analysis or discretionary trading.

#6. Seasonality Trading Systems

Sometimes you come across trading systems that are based on some spurious connection between nature and the markets. Like the turnings of the tides or the phases of the moon.

I just have to laugh. How can you justify buying the market because there’s a full moon out? Do you honestly believe that markets are connected to these things?

That stocks always go up on the first trading session after the Superbowl? That the markets always drop on certain days of the week or certain months of the year?

Occasionally you come across such system ideas even in prestigious publications like Trader’s magazine. But I can’t take them seriously. It’s easy to find these connections in the data if you look hard enough and I just don’t buy it.

If there is one pattern that might work it’s the ‘sell in May and go away’ rule. It seems to have some basis as so many people know about it, but even then I’m dubious. I don’t believe there’s enough data to prove it’s significant.

Even if it is true, it’s not much of a strategy to work with.

Thanks for reading! Please share and comment if you liked/disliked/disagreed/agreed/revered/despised this post.

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2 opinions

    • Jim Krakau

    • November 28, 2014

    • 2:24 am

    • Reply

    “They don’t rely on technical indicators to find profits. They use technical indicators to find long term trends.

    In truth, the indicator is not what is important. The important thing is to find the trend.”

    Please write an entire article on this issue. I need help to understand your point and what I need to learn to avoid losing money putting your book into practice.


    • I will write an article Jim. You might also like to read my trend following with a twist white paper.
      My main point is this: You can take any indicator that’s ever been made, they all try to do the same thing. That is, find stocks (or commodities or currencies or whatever) that are going up. The moving average will crossover, the RSI will go up, the MACD will crossover, the top Bollinger Band will be crossed. These things will all happen when a stock is going up. The long term trend is the most important thing, this is the philosophy. The most basic systems still work. Once you have that, it’s all about risk management and psychology, ie. sticking to the system and having a plan. Working out what works for you and seeing it through.

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