January 17, 2006

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Name: David Seibel
Company: Aurora Futures Corp.
Years Trading: 25

Design & Development of Trading Systems

Read more about the author.

Become a Truly Independant Trader
Learn how to Create Your Own Trading System

Stop relying on the advice and methods of others. Stop paying for Black Box systems that stop working the minute you start trading. Learn to create your own Black Box and become truly Independent! Join David Seibel, President of Aurora Futures Corp, for an intensive 2-Day workshop on the development, design, and execution of Trading Systems. Get more info here!

Design and Development of Trading Systems:
Trading Consistently and Profitably with a Systematic Approach to the Markets

If I ever find the Holy Grail, I certainly won't sell it... Anonymous Trader

Trading is SIMPLE.

The market goes up... The market goes down... Buy low and sell high. With the advent of the e-Mini and the retail Forex markets, traders can electronically trade markets that have trillions of dollars in daily liquidity for very low commissions. One of the biggest barriers to profits, that of high transaction costs and slippage, has been effectively removed from the equation.

Why then, do 98% of the people who attempt to trade, fail?

I said trading was simple... not EASY!

Many new traders are drawn to the futures markets by the ads that promise great wealth with only a $5000 investment. How many websites, with names that always include the words "get rich", are there that take advantage of the most recent major trends (i.e., oil/gold) to entice new money? If J.T. from Bismarck can turn $5,000 into $100,000 in a few short months, why can't I?

Most novice traders wanting to jump into the market rely on the latest tips and forecasts that can be so easily acquired from brokers or the Internet. They subscribe to newsletters, spend far too much time in chat rooms, and buy the latest system that guarantees profits. They will listen to anyone with an opinion and statistics dictate that they will almost always fail. Never before has so much information been so easy to obtain for so little cost. Most aspiring traders will do almost anything (and pay almost anything) to uncover the Holy Grail.

The problem for most new traders is that they do not have a plan. They find the idea of getting their trades from a daily email or newsletter or buying someone else's system as appealing. These people are the experts and their analysis must be better than that of the new trader. Right?

Let me try to answer that by relating a story:

Back in the mid-1980's I was running the Treasury dept for a major US cosmetics manufacturer. One of my primary responsibilities was hedging the company's foreign exchange exposures. This was back before the Euro replaced most of the individual European currencies. We had exposure in about 20 different currencies, making the process fairly complex.

I looked at the markets with a systematic approach. I used mostly technical analysis, along with knowledge of the risk and timing of the exposures to arrive at the most effective hedging strategy. I paid no attention to currency forecasts or prognostications. It was my belief that my primary focus was to hedge the risk and not time the market.

Not wanting to take a personal risk, my boss employed the services of advisors from some of the biggest banks in the world, as well as reading the forecasts from just about every other bank. We regularly had meetings with the chief economists and head currency traders of many of the world's biggest banks. How could he be faulted if things went bad? He was following the advice of the experts! This information was distributed throughout the company in the form of a weekly forecast and monthly foreign exchange committee meetings. My systematic approach was often morphed into a consensus, market timing approach among the many forecasts and gut feelings of the committee members. The results were predictable!
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With all the "expert" advice that was being given to the company, it always came as a surprise when the markets didn't react exactly as the experts predicted. Major moves were almost never forecasted. When some Asian or European country devalued their currency (it happened quite a bit back then) it was always a surprise!

As traders we are constantly bombarded with forecasts and recommendations from some of the industry's heavy hitters. These are the people who are quoted in the press and interviewed on TV. They will make you believe that their forecasts are the Gospel. For the unsuspecting novice trader it would seem very appealing to follow this advice.

Most professional or experienced traders pay no attention to this information. They take it for what it is, a marketing tool. These forecasts, commentaries, and recommendations should be looked at much like the weather forecast. Right or wrong today's forecast is forgotten the minute the next forecast comes out. That is unless you traded based on it!

This very approach is why most traders fail. It is far easier to adopt the recommendations or approach of others than to develop one's own.

I challenge you to find a professional trader that trades off of this type of information.


Consistency can only be achieved through a disciplined, systematic approach that removes the emotional distractions and influences faced by traders.

Put another way... If you develop the knowledge to create your own methodologies and market approach, you will inevitably develop the discipline. You will no longer need or want the advice of others.

Put in yet another way... If you build it yourself, you will understand why it works or doesn't work. You will have the discipline to trade through the inevitable drawdowns instead of just buying another system or enlisting the services of another market guru.

If you would like the ability to become one of the small percentage of traders who succeed, read on.

Developing the Systematic Approach

Now that you've decided to join the 2% of successful traders and escape the other 98%, how do you get there? Here's where the real work begins!

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Aurora Futures Corp. was formed in 2000 in part to develop trading systems for floor traders that wanted to trade off the floor. We quickly realized that the methodology that the traders used combined with our knowledge of system development could be used to teach new traders how to develop a systematic approach to the markets. We would teach traders how to think independently and have the confidence and discipline to trade the markets without the distractions of others. We would accomplish this without teaching specific trading strategies or methods.

As part of this process we created a five level framework for teaching traders how to develop the disciplined, systematic approach that is the key to becoming a consistent trader. The following is a brief outline of the framework:

Understand Yourself

This is the first and arguably the most important step. The trader must look at themselves and the decisions they have made this point to determine:

  • What is your trading style? Why?
  • What timeframe do you trade? Why?
  • Full-time trading or part-time?
  • What is your lifestyle?

Do the answers to these questions compliment or contradict each other?

Understand the Markets

This is the arena you will be playing in. The more you know your markets the better prepared you will be. A small sample of the information needed includes:

  • When does the contract trade (time)?
  • Pit/Electronic or both?
  • What are the expiration dates?
  • What is the value of the contract (point value)?
  • What are the daily movements?
  • What drives the market? This one piece of fundamental analysis (and knowing how to use it) will make a huge difference in any technical system.
  • What about Options & Spreads?

Do you have enough knowledge about the markets you are trading to give you an advantage?

Understand the Technology

Trading has become a technology driven industry. Understanding of that technology and how to get the most out of it is one of the keys to developing trading systems. Like many software packages on the market today, the average user only needs or even understands a very small percentage of the software's full capability. For example, MS Excel has some amazing capabilities for the trader that most people don't even know exist! The traders must have the right tools to succeed.

  • What charting package do you use?
  • What are its full capabilities?
  • Can you use this package to develop your trading ideas and indicators or are there limitations?
  • What other software do you have? Use?
  • Are there other packages that would better suit your needs?
Remember, the cost of a top shelf package vs. that of an average package is usually very small in terms of profitable trading!

Understand the Process

The ultimate goal is to take trading ideas that YOU have developed and turn them into a tradable system. In order to accomplish this, the trader must develop an understanding of the methods involved in the process:

  • Development of trading ideas
  • Putting ideas into systems
  • Is the system tradable in real time?
  • Proper use of indicators
  • Designing custom indicator

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  • Back testing & Forward testing - Understand the limitations of automated testing
  • Are the results real & repeatable?
  • Optimization vs. Curve fitting - knowing the difference!
  • Risk Management
  • Cash Management

Great care must be taken by the trader to ensure that all the work that is put into the system will produce a profitable system that can be traded. You would be surprised how many traders I talk to that have developed systems with so many indicators and so much analysis required, that they are never able to execute a trade.

Understand the "Game"

You've put in the time and effort to develop a system that looks like a winner. It's now time to step on the field. Even the best systems can turn unprofitable when it comes to execution. A trader must thoroughly understand how actual trading issues will affect their performance.

  • Is your broker right for your style of trading?
  • What type of broker do you need?
  • Are you paying the proper commission rate for your level of service?
  • Are trades easy to execute using the brokers trade execution software?
  • What is your strategy for order entry?
  • Stop Placement?
  • Taking Profits?
  • Are you getting good execution and service?
  • What happens when a problem arises?

Just like in football, the best game plan in the world can quickly unravel due to poor execution! Understand the "Game" and you will give yourself the best chance to win.

Trading is a business. It is an extremely simple business that is probably the toughest thing you will ever attempt. Like any business venture it should be entered with a plan, the knowledge and tools required, and sufficient capital to see the plan through.

Learning the systematic approach and being able to take ownership of one's own trading decisions will allow the trader to endure the inevitable emotional roller coaster that trading can be.

There is no Holy Grail.

Become a Truly Independant Trader
Learn how to Create Your Own Trading System

Stop relying on the advice and methods of others. Stop paying for Black Box systems that stop working the minute you start trading. Learn to create your own Black Box and become truly Independent! Join David Seibel, President of Aurora Futures Corp, for an intensive 2-Day workshop on the development, design, and execution of Trading Systems. Get more info here!

About Today's Author

Dave Seibel is President of Aurora Futures Corp. in New Jersey and a registered Commodity Trading Advisor. Formed in 2000 by Mr. Seibel, Aurora Futures Corp. specializes in the development of trading systems for its individual clients as well as consulting on the process of system development through private and group workshops. Mr. Seibel, in his capacity as a Commodity Trading Advisor, manages individual accounts for investors, and is Managing Member and Trading Advisor for Aurora Intraday Index, LLC.

Mr. Seibel is a graduate of Worcester Polytechnic Institute and the Fordham School of Business.

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