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Trading Systems Pros and Cons

Even God cannot change the past.

agathon

In my years of trading, I have met essentially four types of traders: the purely technical trader, the purely fundamental trader, the techno-fundamental trader, and the intuitive, seat-of-the pants, guts-and-glory trader.

The Purely Technical Trader

Although there are relatively few traders who are pure market technicians, there is much to be said in favor of such an approach. But being a pure technician should not be taken as synonymous with being a disciplined trader. Yet the technical approach, as long as it is not subject to interpretation, can be very helpful in the formula for successful trading.

The purely technical trader is more concerned with analysis and the realities of his or her technical indicators than in the news backdrop, the ramifications of politics on the markets, or the emotion of traders (unless these can all be quantified and expressed as indicators). While many traders fancy themselves to be pure technicians, they are, in fact, not as pure as they may imagine themselves to be.

They allow subtle external influences to creep into their decisionmaking process in spite of their supposedly technical bent.

The good news for market technicians is that they are apt to be more disciplined and less subject to the emotional reactions that are often associated with losses in trading. By remaining focused on their indicators, they will be less apt to respond to situations emotionally and, therefore, more likely to trade mechanical systems with strict discipline. Hence, the benefits of being a pure technician are as follows:

ж Clearly defined rules for market entry and exit

ж Specific rules for exiting losing trades

ж Less likelihood of riding losses beyond their dictated exit points

ж Greater likelihood of maximizing profits by not exiting too soon

Are there any cons to the use of a purely technical approach? Some traders would have us believe that being a purely technical trader ignores the realities of the marketplace. They claim that international and domestic events can, and do, have a major impact on price trends and patterns. Hence, they claim that the technical trader is like an ostrich with its head in the sand. The technical trader would retort by stating that a good technical system will anticipate major events, allowing the trader to enter before they occur or, at the worst, shortly after they begin. On the other hand, the retort to this claim is that some events, such as catastrophic weather or assassinations, cannot be predicted. The technician would reply that in such cases, which are few and far between, the system would protect the trader by taking a loss. Hence, risk management "saves" the system trader when the trading method is surprised by unexpected events.