Systematic Advantage #33: Systems Can Be Easily Evaluated to Reveal Points of Weakness
Systematic trading gives traders the distinct advantage of evaluating their strategies systematically. Unlike discretionary trading, which can be affected by personal opinions and emotional decisions, systematic trading relies on clear and quantifiable rules and parameters that make it easy for traders to conduct backtesting and analysis. This helps traders identify potential weaknesses or points of failure in the system and further improve their strategy.
By looking at the historical performance of a trading system under various market conditions, traders can find patterns that cause losses or reduce profitability. These could be market circumstances where the system cannot perform well, wrong risk-reward ratios, or certain algorithm parts that do not yield desired results.
Furthermore, traders can only invest in systems that may look promising but fail to meet expectations in actual trading due to overfitting, curve-fitting, or a lack of adaptability to ever-changing market conditions. Identifying these systems through systematic evaluation allows traders to protect their capital from unnecessary losses.
