Beating the Financial Futures Market

11/01/2006 12:00 am EST

Focus:

Art Collins

Author, When Supertraders Meet Kryptonite

In the trading world, there is a constant debate between objective and subjective trading methods. Art Collins, in his fourth book, Beating the Financial Futures Market, reminds us that the financial futures trading world is littered with failed geniuses, who spent their days trying to outthink the markets. He correctly points out that the reason most subjective traders fail is because the psychological hazards of trading often do not allow for the discipline required to obtain consistent results, causing the trader to fail. As he states further, Anyone sufficiently capitalized and determined can make mechanical systems work. Spontaneous reactive trading success, however'the stuff of commodity trading legend'is down to personal wiring.” In Art's view, it is this conclusion that suggests the majority of traders can only achieve consistent, positive results by using a system.

Art takes you step-by-step through the process of building a trading system, adding a series of mechanical rules to demonstrate how the additional rules can improve the performance. The reader should be aware that the book is full of testing results tables that demonstrate how the performance changes with the additional rules. For those of us that are familiar with testing a trading system, the tables are easy to understand. For those who are not, it would have been helpful if Art had explained the various components of his tables early in the book. Of course, this is a minor suggestion, because if you are not willing to take the time to thoroughly examine and dissect the trading results, you probably are not yet ready to build a system.

The goal of the book is to show you how to build your own trading system in a logical manner, but he also provides many of the building blocks of a profitable system. For example, he tests a system based on the closing price versus a 40-day moving average. If it closes above it, you buy, and if it closes below, you sell. Either long or short positions are closed out on the same day. By Chapter 12, he has combined five indicators which significantly improve the results. As each new variable is added and tested, the results change and generally get better. I feel confident that the beginning to intermediate trader will find some new ideas here and his thoughts about combining these indicators, often referred to as indexing, will stimulate many advanced traders into doing further research.

I have really just scratched the surface of the book as Art also goes into targeting a trading system to a specific sector (bonds, stocks, or currencies), trading on specific days of the week or month, and intra-day systems. In short, if you are thinking about developing a system or learning about system trading, this book is a must. Art clearly demonstrates that it takes hard work and discipline to develop a trading system, but also that, in the end, it is worth it.

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