Successful system trading, in spite of the financial rewards, can be frustrating.  A quantified mechanical model will take many decisions off the table.  Yet, various issues, particularly the psychological approach to the issues, will always be in play.

Ed Seykota in the book, “Market Wizards,” writes, “Systems trading is ultimately discretionary.  The manager still has to decide how much risk to accept, which markets to play, and how aggressively to increase the trading base as a function of equity change.  These decisions are quite important, often more important than trade timing.”

It seems most sophisticated traders are aware of the fact that a system needs to be properly quantified and tested before trading. The sample size of the trades needs to be large. These traders are familiar with the terms of curve fitting and optimization. I wonder, however, how many traders continue to study the model as they trade their equity. How many understand the logic behind the entries, stops, exits, and money management techniques. How many are adjusting position size to meet expanding and contracting volatility and changes in market correlation.

Seykota also points out in the book, “Market Wizards,” that at times, “The markets shift from trending to non-directional price action.  These systems become unprofitable and under-capitalized. The trader without experience will be shaken out. Longevity is the key to success.”

It is this discretionary knowledge that examines the risk and helps build one’s confidence. Without this understanding, doubt will come into play and longevity compromised. A draw-down will inevitably force a decision based on emotion and not sound trading principles.

It is in our human nature to prefer pleasure, and avoid pain.  In spite of our natural instincts, good trading sometimes requires us to act against our natural inclinations. We must do what is necessary, not what is comfortable.