System Development

A trading system is simply a group of specific rules, or parameters, that determine entry and exit points for a given equity. These points, known as signals, are often marked on a chart in real time and prompt the immediate execution of a trade.

At GWS, we believe that a systematic approach to trading is the only way to generate consistent results and ensure long term profitability.

This systematic approach consists of clear, predefined rules for all trade setups including; entries, stop-losses, profit taking exits and position sizing for every single trade.

When developing a system for trading, there are a number of key considerations:

Firstly, the system must be robust, meaning it is able to replicate historical performance in real time trading and varying market conditions. Therefore we keep our system rules to a minimum and avoid optimising our system to fit past data.

The system must also have a positive expectation, meaning it makes money over the long term. This may seem fairly obvious, but most traders fall into the trap of believing in the law of small numbers - getting excited when they make some money from a "new" pattern or setup and then thinking that they can replicate that performance over the long-term. It may well be that they can, but we prefer to confirm this by testing the system using a sufficient amount of data and over a sufficient period of time. If the system does indeed have a positive expectation (including commissions and slippage), then we move forward with live trading. If not, then we are simply not interested.

Another crucial factor that is often overlooked when developing a system is the expected performance of the system on a day to day basis. For example, the system may only deliver a winning trade 35% of the time, or experience prolonged periods of drawdown and yet still be able to deliver a good return over the long-term. Most people, having rushed into trading their system, are not used to the strings of losses and the pain that comes with it - they only have a nice report with some figures which tell them that there is a positive expectation. As a result, many good and profitable trading systems are abandoned when they experience a period of drawdown, only to miss the large profitable winning trades that inevitably follow. To insulate ourselves against the emotional effects of such periods, we use our historical data to determine worst case losing streaks and drawdowns. We also conduct extensive live testing before ever committing money to our systems, to confirm that the live performance is in line with our historical expectation. Then, when we are trading the system, we are able to weather these periods of drawdown because we understand the expected performance of the system.

We believe that our edge in the markets comes not just from our trading methodologies and systems, but our approach in developing and testing these systems. We are consistently testing new systems and are on the cutting edge of trading technology.