Do You Believe in Your System?

The market will challenge your faith in your system in every way possi­ble. The market uses the well-known maxim of war: "Lure them with greed, conquer them with confusion." The markets will constantly cre­ate new chart patterns that can confuse your analysis. Unless you have absolute faith in your system, the markets will push you to meddle with your system. They will push you to override your signals, alter your plans, bend your system rules, invent new exceptions—all in the name of "improving performance." The only place to improve system design is with rigorous back testing and prospective paper trading. Any untested deviation provides short-lived gratification, which can seriously erode long-term performance.

You should pour all your creativity and emotional needs into creat­ing a system that works for you. Your system should have the time hori­zon, trading frequency, market sensitivity, and profitability that you con­sider essential. Once you have rigorously tested the system on historical

244 A System for Trading

data, you should test it on scrambled data. You will quickly discover the type of markets the system likes and dislikes when you test it on scram­bled data. You will also have greater confidence in the system's future performance by testing it over many sets of scrambled data. You can fol­low up system testing with paper trading to clarify the mechanics of the process. Once you are satisfied that this is the system you want, you should resist all unchecked attempts to modify it.

The markets push you to reexamine your faith in your system. You should not use a system unless you can reaffirm your full faith and con­fidence in that system every day. If you do not believe in your system, the market will quickly push you into deviating from it. Once you devi­ate from a system, you are trading an untested system, and all bets are off. Of course, you can ask why you should stick to a tested and true sys­tem. The answer is found in the next section.