Automated Trading Systems, Uncategorized

How Innate Human Behavior Limits Effectiveness of Trading System Development

Designing any form of automated trading system is filled with follies of basic human behavior. The ceaseless desire to identify patterns in otherwise abstract data to the lust for wealth all cloud the appropriate diligence in creating a system with a measurable and meaningful competitive advantage.

Systems are developed with the idea of an initial truth, or the basis of how the system can otherwise find a way to generate a favorable reward to the risk applied. Once the idea of the initial truth is established, the process of creating the system is underway. This process plants several inevitable debts which can lead into a sunk cost fallacy which causes one to forcibly look for favorable outcomes in system performance.

  • Your time into creating the system
  • Your money into developing the system
  • Your ego of seeing your system succeed

Once your trading system is created and ready to test, the first two debts are already in play – you want the system to test well or that time and money invested would have otherwise been wasted. If the initial test looks poor, you will innately attempt to find ways to make it look better rather than scrapping it altogether. This approach leads to curve fitting performance as the data is already known and therefore used to your advantage. Tweaking the system to validate yourself will produce a system destined for failure in the uncertainty of future price data.

If the initial performance is good, while a positive sign, can be just as detrimental. The reason for this is that the acceptance of success puts a lesser emphasis on testing the fragility of the system with the fear that the initial results were unreasonable or just lucky.

Any system developed needs to be put through the proper stress test before it should be run in a live setting. In order to do this, you need to know the proper way to test the system in a way that honors the logic and perceived edge, but also shield yourself from walking away if the system is proven invaluable. The latter can be a difficult thing to overcome depending on how much time, money and effort was put into its development.

Lucrum Trading Systems is capable of being the unbiased third party to shield the inherent bias of a system designer and perform the necessary tasks to give confidence to proceed into a live environment. Schedule a consultation today to see how Lucrum can assist you with your trading system.

Your time and effort were put into the development of your trading system and while the initial investment may be great, the potential loss is even greater if it is not properly tested for live trading with the complete uncertainty of the future.

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