A Systematic Approach to Trading
Nick Radge what type of trader are you? What is your trading approach?
I have an extensive background in technical analysis. I am a 100% systematic trader. I trade trend following systems for the majority of my funds and also a selection of mean reversion systems as well. It is 100% systematic.
I focus on both Australian and U.S. markets. I traded futures for first fifteen years but really the only futures I use now is to hedge my U.S. exposure when required.
Are hedge positions still a systematic trade? Or are they somewhat discretionary?
Somewhat discretionary, it’s rule based discretionary. So I have specific triggers that tell me to put a hedge on and tell me to take a hedge off but it’s not systematised.
How do you define a trend following approach and how would you differentiate that from momentum trading?
They are slightly different, although based on the same principles. Obviously the foundation principles of both trend following and momentum is to cut the losses and let the winners run. The difference between the two however is that trend following references each signal in isolation. So we would be looking at Microsoft on its own. Is it trending up or is it trending down? And do I put a position on, based on the trend of Microsoft itself?
Momentum is slightly different in that it references individual symbols against each other. For example, let’s use the S&P 500 constituent list. Out of the five hundred stocks, which are the strongest and which are the twenty weakest? You would rank them and then you would buy the strong ones. If you were trading on the short side, you would sell the weak ones.
When you rank stocks in this particular way, what time frames are you looking at? When you say they are top twenty strongest, over what period of time?
I use two hundred days. Really anything from thirty days outwards is pretty robust. Generally speaking, less than thirty days you tend to get more of a mean reverting principle with stocks. Three months is pretty common, six months is common, and all the way up to one year works very well.
As a systematic trader, the goal is to repeat the same types of trades over and over again, using strict rules for buying and selling. This is very important. There’s no point having a systematic approach if you’re not going to follow the rules, and place the trades. Some people struggle with rule based trading. They want to think they’re in charge.
I need confidence in what I’m doing. I need to know what I’m doing has a positive expectancy over the longer term, and if I know that, then I can trade with complete confidence. I have literally no fear and no reason to listen to anybody else’s input. I’ve tested the system robustly. If I have a validated system that’s proven, then I have complete confidence in every trade I place, whether it’s a winner or a loser doesn’t matter. So long as I understand that the strategy has a positive expectancy over the longer term, I remove most of the emotion.
