Subjective or Rule-Based Trading System

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Subjective or Rule-Based Trading System?

There are two main streams of thought when it comes to trading systems and strategies. There are those who believe an entirely rule-based system works best. There are others who believe a more flexible approach to trading is required, where guidelines are used, but not fixed rules. Then there are traders, like myself, who fall in the middle, using rules and guidelines to come to come up with strategies that have some flexibility, but also have a discernible edge over time. Here we look at these different trading styles, which approach works best for certain types of traders and the advantage and disadvantages of each. By understanding the differences, hopefully you’ll be better able to find or fine-tune strategies to suit your preferences and personality.

Rule-Based Trading Systems

A rule based system is one which precisely defines a trade set-up, determines exactly how much money will be placed on the trade (position size), as well as what the risk and profit will be.

Basically, once a trade signal occurs, a stop and profit target are placed (which may possibly be moved based on other rules) and there are no further decisions to make. The trade stays on until either the stop or profit target have been hit, or in the case of binary options, the trade expires.

The simplest rule based system is one where a profit target and stop are placed at the outset of the trade, and do not move. There is nothing for the trader to do once the trade is on, except wait for the trade to close via the stop, profit target or expiry.

New traders should typically start with this approach. Everything is defined so there is less emotional involvement (although it can still be emotionally difficult to implement a rule based system). It is also possible to “automate” rule-based strategies by writing a program so that it can essentially run without human involvement. Of course this requires coding skills and a deep understanding of the strategy being employed.

The advantages are that you can precisely define your risk and reward. You know exactly when to take trades, and once the trade is on, there is nothing left to do. By backtesting and using your strategy you’ll gain confidence in seeing that the strategy makes money (if it is a good system) as long as you follow the rules of the system.

The downside is that during a trade you may see market conditions change. During the trade it may become evident that your stop is going to get hit before you target (although it is never a certainty). The rules do not allow you to get out though–you must let your stop get hit.

Since most new traders get quite emotionally while trading, this downside is not typically a major problem since following the rules allows them to be more profitable than if they used a subjective system.

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Subjective trading systems are “guideline” based, not rule based. It is up the trader to discern when to take trades, and when to get out.

This type of system is typically by used by experienced traders who have a keen understanding of how the market moves are able to trade with a clear mind, which isn’t too swayed by emotional distractions.

Subjective systems are harder, if not impossible, to backtest. Traders, must simply trade a demo account or real account to get a sense of their success. Subjective systems should still be rigorously tested in this manner. Just because it is a “subjective” system doesn’t mean the trader can do whatever they want. There should still be guidelines, and the trade setups and exit methods used should show profitability over many trades, preferably in a demo account, before real money is put at risk.

Subjective systems have the advantage of being adaptable to changing market conditions. This may allow for slightly more profit potential or a higher win rate than a rule-based system (although not necessarily, as each rule-based and subjective system is different).

The downside is that these systems are hard to backtest, and therefore require the trader simply practice their approach over and over again to get a baseline for how they perform. Emotions may play a larger role in a subjective system, which is why this type of system is typically used only by experienced traders.

Experienced traders typically begin with a rule based system, and then see some potential areas of improvement over months of trading and therefore allow for some flexibility of the system (rule-based to subjective).

Subjective and Rule-Based

As indicated, many experienced traders began as rule-based traders and then later allow for some flexibility as they realize there are areas of their strategy that could be improved by allowing flexibility.

For example, a fixed stop or target may be used at the outset of a trade, but the profit can be increased if the price is running well. Certain trade signals may be skipped if a specific price pattern is present or absent. If conditions change while a trade is underway, the guidelines may allow the trader to take profit or losses early, instead of waiting for the original stop or target to get hit.

In this way there are rules for some aspects of the trade, but other parts of the trade are under the discretion of the trader. Which aspects are ruled based and which are discretionary will be up the individual trader and how they trade.

The advantage is that traders get the best of both worlds, at least theoretically. New traders will typically find they do best with a rule-bases system, simply because they don’t have the market knowledge or discipline to take advantage of discretionary decisions or real-time market changes. But as they progress, implementing some discretionary aspects may yield better performance.

One type of trading system isn’t better than another. It depends on the trader, their experience and their personality/emotional makeup. Some traders will do better with a rule-based system, while others can improve on that performance by incorporating some subjective decisions into their trading. No matter what type of system is used, traders should seek to only risk a small amount of capital on each trade, since even the best traders can experience a string of losses, and if too much is risked a few losses can cripple a trading account.

Why Professional Traders Use Rule Based Trading Systems

A professional trader in my opinion is someone that has been trading successfully for a relatively long time (3+ years) and has maintained account growth through adverse market conditions.

A trader that has made a bucket load of money overnight is not a professional in my opinion, they are a lucky trader…

Professionals make money in favorable market conditions and control risk and exposure in unfavorable conditions.

So how do you know when you’re in favorable market conditions?

Successful Traders Have A Rule Based Trading Method

I’ve been fortunate enough to speak to thousands of Forex traders in various stages of their journey.

Being a part of one of the top Forex Trading Schools has gave me unique insight into key factors that advance traders closer to achieving their goals.

I’ve came to this conclusion for myself and other successful traders I’m surrounded by…

More Rules = More Consistent Success

This is especially true for new traders just getting started in Forex.

Having clear cut rules keeps you on the sidelines when the market is not dancing to your rhythm. At the same time it helps you recognize when there are opportunities to slip in and out of the market grabbing pips and reducing exposure.

What Rules Should You Develop?

Traders that are making money consistently typically have 3 main sets of rules.

  1. Rules For Entry
  2. Trade/Money Management Rules
  3. Rules To Exit The Trade

The more defined your rules are the better you will understand how your system is performing in any given market condition.

Subjective, or discretionary traders often become too emotional and uncertain about trading decisions.

Emotions of uncertainty can ultimately destroy a traders confidence, which then leads hesitation or missing good trades altogether. Most of the negative emotions associated with trading can be avoided by having clear rules in place!

Developing A Rule Based Trading Software

The FxPM software is by no means the holy grail to Forex Trading. There is no holy grail in trading, and if someone says they’ve found it, run the other way.

However, many of the rules mentioned above are built into the FxPM Software to add a level of simplicity to defining trading opportunities.

This allows a new to trader start out on the right foot, and an advanced trader can improve their results by visualizing more data in a simple to view format.

Lets take a look at a few Position Entry rules that the FxPM software helps us clarify.

Price Action Band Shades

The Price Action Band Shades that are built into the FxPM Matrix allow you to see Overbought and Oversold market conditions at a glance. This gives FxPM traders very simple criteria to create rules and help base trading decisions on.

Aggressive or more active traders may take trading positions in the middle “neutral” zone. Typically their position sizing is significantly reduced because win/loss ratios are not as high in the middle zone.

More often traders prefer taking trades in either the Green Buy Zones or the Red Sell Zones. Win ratios are much higher in these areas.

Waiting for trading opportunities in the Buy and Sell zone forces patience and discipline, one of the hardest things to master as a full time trader.

Mastering patience and discipline takes some traders years to develop. This platform helps solve that problem the moment you start trading with the Forex Matrix.

Dynamic Fibonacci Indicators

When it comes to pinpointing high accuracy rule-based entry points, Dynamic Fibonacci clusters like the ones in the image below are the secret sauce to FxPM’s renowned reputation for high accuracy entries.

Creating entry rules around how you enter a 1,2,3,4, or 5 column Fibonacci cluster will greatly increase your success ratio.

Some of our trader increase or decrease position size, manage their stop loss more aggressively, or let profits run longer depending on the strength of the level.

Adding another layer to your entry criteria helps weed out the mediocre setups.

Trade Management Rules

Creating detailed rules around your trade management largely depends on your trading personal trading style.

With that said, here are a couple solid principles that should always be followed no matter what style of trading you adopt.

  • NEVER Widen Your Stop-loss
  • NEVER Risk More Than Half Of What You Stand To Gain

Those two rules alone will keep you out of trouble.

Another major advantage of the FxPM Software is that it automatically places your predefined Stop-loss and Take-profit for you which eliminates unnecessary mechanical steps.

Creating Trade Exit Rules

Much like money management, these rules will largely depend on your individual trading style.

Some examples our traders use are when the 1 minute trend indicators start to go against our position.

Other examples of fixed trade exit rules are simply taking profit when your 1:2 or 1:3 risk/reward ratio is met.

Conclusion

Trading with a Rule Based Trading System has huge advantages over discretionary trading.

Professional traders will disagree on many things when it comes to Trading strategy and methodology, but one thing we will all agree on is that rule based trading helps ensure long term trading success.

It will allow you to keep emotion curbed to the sidelines and focus on executing your strategy based on your well thought out and planned rules.

What rules do you have in your trading plan? Share in the comment section below!

Matt Miller

For over 9 years I have been trading Forex and working closely with Armando Martinez, the Founder and creator of The FxPM Software to develop FxPM. It is our goal to develop a Forex Software that not only simplifies trading decisions but also delivers institutional performance to the retail trader.

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Dangerous People Are Teaching Your Kids (April 2020).

Innhold:

Regelbaserte handelsmenn bruker et bestemt sett med regler for å veilede sine handlinger. Subjektive handlere tilpasser seg forandrede markedsforhold, noe som betyr at hvordan de handler kan variere noe fra dag til dag. Er en måte bedre enn en annen? La oss utforske fordeler og ulemper ved hver.

Å ha et handelssystem

Uansett om du handler et subjektivt handelssystem eller en regelbasert, har den viktige tingen en system- og handelsplan i utgangspunktet.

Å ha noen form for system, som du har testet og praktisert, er bedre enn ikke noe system i det hele tatt. “Tilfeldige handelssystemer” er det de fleste bruker når de starter trading. De tror de kan gjette / forutsi sin fortjeneste uten å sette inn tid og forskning som prohandlere legger inn. Diagrammer ser lett ut til å handle i ettertid, men i sanntid er det ikke lett å handle. Derfor handel med et system du har forsket og har en lønnsom kanten på historiske data. Så test det ut i en demo-konto for å se om det faktisk fungerer før handel med ekte kapital.

Regelbasert handel er den enkleste og mest stressfrie handelsformen … når du har definert et sett med regler (for oppføringer, utganger, posisjonsstørrelse, marked, tidsramme, ordre typer, risikostyring). Det anbefales at alle nye handelsmenn starter som regelbaserte handelsmenn for å finpusse disiplinen. Når regelbasert handel er lønnsomt, vurderes et subjektivt system.

Et regelbasert system er utformet for å “sette og glemme.” Du plasserer handlingene og de utvikler seg til de stopper ut, et mål er nådd eller et etterfølgende stoppfall er truffet. Traderen forstyrrer ikke handelen når den er på plass. Oppføringer er nettopp definert basert på regler, så det er ingen waffling over om en handel er gyldig eller ikke.

Dette avlaster noe av det psykologiske presset av handel; Det er ingenting å gjøre, bortsett fra handling i henhold til planen, og sitte på ens hender når det ikke trengs noe.

Traderen får fortsatt forventning om å se om handelen deres vil bli en vinner eller ikke, men de trenger ikke å analysere ny informasjon hver sekund. Det er ingenting å gjøre mens du er i en handel, bortsett fra å vente eller se etter andre gyldige handler i andre tillatte markeder.

Med et regelbasert system vet du nøyaktig hva du får. Inn- og utgangsregler er nettopp definert, slik at systemet lett kan viderekobles til andre og er lett testet for lønnsomhet. Hvis lønnsomheten faller godt under normal, i lengre tid enn normalt (normalt er en grunnlinje etablert under testingen), kan reglene i systemet kanskje justeres. Så selv regelbasert handel krever lekser. Mange handelssystemer (spesielt kortsiktige) vil ikke være lønnsomme for alltid og vil kreve justeringer regelmessig for å holde dem lønnsomme.

Regelbaserte systemer er ikke tilpassbare til dagens markedsforhold, med mindre reglene er justert som ikke bør forekomme veldig ofte. Hvis du er i en lang (kjøp) handel basert på ditt system, og trenden går mot deg, må du la handelen spille ut.

Du går ikke inn og ut av handel tidlig. Dette er bra for handelsmenn starter ut fordi de fleste nye handelsfolk ikke er dyktige nok til å skille mellom et lite trekk mot dem og en reversering.

Fordi det regelbaserte systemet ikke kan tilpasse seg dagens markedsforhold, kan det være utsatt for perioder med høy lønnsomhet og perioder med negativ avkastning. Mens systemet kan indikere at du kan lage 10% per måned i gjennomsnitt over 100 måneder, kan de vinnende månedene være mye høyere og miste måneder på negativt territorium.

Subjective Day Trading

Subjektiv handel er for handelsmenn som har vært lønnsomme handelsmenn i en stund og forstår markedsdynamikk. De kjenner ting som ikke er lett kvantifiseres. De kombinerer flere deler av informasjon for å gjøre en handelsavgjørelse som ikke kan defineres nøyaktig i regelform.

Subjective traders handel basert på retningslinjer, ikke regler. Retningslinjer gir fleksibilitet for å endre kurset ettersom ny informasjon blir tilgjengelig. Med et regelbasert system er det ikke fleksibilitet.

Subjektive handlere har fortsatt en plan, men de skjønner at en god handelskonfigurasjon ikke alltid passer innenfor en presis regel. For eksempel, hvis handel med et hode og skuldre mønster, kan mønsteret ikke passe de nøyaktige parametrene til et klassisk hode og skuldre mønster (kanskje det har 3 eller 4 skuldre i stedet for 2). Ved hjelp av en regelbasert metode kan denne handelen omgå, men de subjektive handlerne ser det fortsatt kan være en god mulighet. De utfører deretter sin strategi for handel den typen mønster, dersom de anser handelen verdt risikoen.

Subjektiv handel er mer intens og krever mer fokus enn regelbasert handel. Subjektive forhandlere analyserer kontinuerlig ny informasjon, factoring hvordan det vil påvirke dagens bransjer og hvor de vil ta fremtidige handler. Hvis en subjektiv handler er i en handel, og deres analyse indikerer at prisen beveger seg mot dem, og sannsynligvis vil nå sitt stoppfall, kan de gå tidlig for et lite overskudd eller et mindre enn planlagt tap.

For den ekstra stressen er belønningen at det subjektive systemet tilpasser seg forandrede markedsforhold. Trader er der så se volatilitet slippe / øke, eller at markedet utviser en viss tendens som kan kapitaliseres på. Denne evne til å tilpasse seg endrede markedsforhold – når det gjøres bra – betyr en mer konsistent lønnsomhetskurve, og ofte høyere overskudd enn et sammenlignbart regelbasert system. Subjektive tradere er mindre sannsynlig å ha svingninger i lønnsomhet hver måned. Noen måneder vil være mer eller mindre enn gjennomsnittet, men sannsynligvis ikke i samme grad som et regelbasert system (selv om dette selvsagt avhenger av den enkelte næringsdrivende og sysselsatte).

Avsluttende ord på Subjective Versus Rule Based Trading

Både subjektiv og regelbasert handel har fortjeneste.Det anbefales at alle handelsmenn starter med et regelbasert system. På denne måten blir de tvunget til å undersøke en strategi og holde seg til den. Denne prosessen bygger markedskunnskap og disiplin. Bare en gang en næringsdrivende kan se en måte å øke fortjenesten i sitt regelbaserte system bør de vurdere å konvertere det regelbaserte systemet til en subjektiv. Å bygge disiplin før du bruker et subjektivt handelssystem er viktig. Siden subjektiv handel er mer stressende enn regelbasert handel, er det vanskelig å gjøre objektive handelsbeslutninger som ikke er drevet av følelser, hvis du ikke er tilstrekkelig forberedt.

Opprett et regelbasert system, og hvis du er fornøyd med resultatene, hold deg til den. Hvis du foretrekker å være engasjert i markedet, kom opp med retningslinjer for å forbedre regelbasert system som gjør det mer subjektivt. Begynn å implementere retningslinjene for ditt nye subjektive system, og sammenlign deretter resultatene med det regelbaserte systemet. Hold deg til den som utfører bedre konsekvente.

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