What is system trading? Advantages and disadvantages

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What is system trading? “Trading mechanically according to investment ideas backed by the past” is called system trading. This time, we will introduce the features of system trading, advantages and disadvantages, and how to find good investment ideas.

What is system trading? Advantages and disadvantages
What is system trading? Advantages and disadvantages

What is system trading?

Suddenly, I’ll tell you a parable.

Suppose you have two investment ideas in front of you. One is an investment idea that “steadily earned an annual interest rate of 10% over the past 20 years or more.” The other is an investment idea that “somehow looks good, which I came up with yesterday.”

Which do you want to use?

You don’t need to ask the answer, right? (Laughs) If you’re right, I think you’ve chosen “an idea that has steadily earned an annual interest rate of 10% over the past 20 years or more.” At least because it has a track record in the past. It seems that this person will continue to make a profit in the future. If you want to manage it anyway, you want to follow the “investment ideas backed by the past”.

“Trading mechanically according to investment ideas backed by the past” is called system trading . This time, we will introduce the features of system trading, advantages and disadvantages, and how to find good investment ideas.

What is system trading?

System trading is an investment method that “trades mechanically according to investment ideas backed by the past.” In other words, there is no discretion (intuition).

In system trading, there is no “somehow” trading. There is no need for discretion (intuition), so even beginners with no experience can easily get started . In system trading, we operate in a way that is backed by the past. Therefore, it can be said that it is easy to grasp the image of making a profit .

On the other hand, it also has the disadvantage that it is difficult to deal with situations that are unprecedented in the past . For example, there may be a crash that exceeds the Lehman shock, or there may be a nuclear war. Since system trading is an operation method learned from precedents, it would be difficult to deal with it without precedents.

How to find an investment idea

Investment ideas are found by aggregating historical data and looking for profitable ones. By aggregating past data, you can see the “win rate” and “profit and loss”.

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To find a good idea, you should focus on two points: “whether the winning percentage is 50% or more” and “whether the profit or loss is positive”. If you divide these two cases, you can classify them into the following four investment ideas.

  • “Win rate is 50% or more” and “Profit and loss is positive”
  • “Win rate is less than 50%” and “Profit and loss is positive”
  • “Win rate is 50% or more” and “Profit and loss is negative”
  • “Win rate is less than 50%” and “Profit and loss is negative”

The results you get make it easy to tell if your investment idea is good or unusable. From now on, I will introduce a concrete way of distinguishing. First, let’s take a look at “the winning percentage is 50% or more and the profit and loss is positive”.

Profit and loss is positive when the winning rate is 50% or more

What is system trading?
Profit and loss is positive when the winning rate is 50% or more

Since the winning rate is 50% or more, more than half of the total number of trades are winning trades, and there is a possibility that profits will increase with each trade. It can be said that it is the lowest risk and high return pattern .

Win rate is less than 50% and average profit / loss is positive

In this case, assets will increase as shown in the figure below.

What is system trading?
Win rate is less than 50% and average profit / loss is positive

Since the winning rate is less than 50%, more than half of the total number of trades is a losing trade, but since the average profit and loss is positive, the profit at the time of winning trade is large, and there is a possibility that the profit will increase with each trade. However , it will be difficult to operate for those who cannot tolerate repeated losing trades .

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Win rate is 50% or more and average profit / loss is negative:

In this case, assets will decrease as shown in the figure below.

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Win rate is 50% or more and average profit / loss is negative:
Win rate is 50% or more and average profit / loss is negative

Since the winning rate is 50% or more, more than half of the total number of trades are winning trades, but since the average profit and loss is negative, the loss at the time of losing trade is large, and there is a possibility that profit will be lost with each trade. .. Even though the winning percentage is high, it is not profitable overall. It is best not to incorporate such ideas into actual operations.

Win rate is less than 50% and average profit / loss is negative:

In this case, assets will decrease as shown in the figure below.

Win rate is less than
Win rate is less than 50% and average profit / loss is negative

Since the winning rate is less than 50%, more than half of the total number of trades are losing trades, and the average profit and loss is also negative, so the loss at the time of losing trade is large, and there is a possibility that profit will be lost with each trade. .. In addition to losing often, the balance is also negative. It would be safer to avoid this pattern as well.

The results of system trading can be roughly divided into the above four patterns, but which one should be used in practice? I think most people choose “win rate is 50% or more and profit and loss is positive”. In this way, when you come up with an investment idea, it is a good idea to check in advance what kind of results you have achieved in the past.

So how do you think about how to actually come up with an investment idea? It’s easy to say, but it takes some training to get used to it. Therefore, I would like to introduce one investment idea that “win rate is 50% or more and profit and loss is positive”.

Advance investment in “vesting” and “buying dressing”

The idea for this investment idea is simple. The idea is to buy the Nikkei Stock Average at the end of February and sell it at the end of March.

Since March is the end of the fiscal year, it is the month when the financial results for the fiscal year ending March are fixed for most companies. It is also the month when there are shareholder benefits and dividend vesting along with the settlement of accounts . It is also thought that institutional investors and others will “buy dressings” to show the financial results at the end of the fiscal year. If you buy stock at the end of February ahead of these events, you may be able to make a profit.

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Therefore, this time, I decided to use an analysis software called “Master of System Trading” to check past stock price data. Specifically, we will verify the investment idea under the following conditions.

*****************************************************************************************************************************************

_ 1990-2017 (28 years)
Target stocks: Nikkei 225 stocks
Buy rules: February 26th, 27th, 28th, 29th, buy and
sell rules on the next day market: From the day of entry After 25 days or more, sell at market the next day

*****************************************************************************************************************************

rice field. Then, the following results were obtained.

rice field. Then, the following results were obtained.
rice field. Then, the following results were obtained.

As a result of the verification, the winning percentage was 57.51%, which exceeded “50%”. In addition, the average profit / loss ratio was 2.26%, which was positive. “The winning percentage is 50% or more, and the profit and loss is positive.” By following this investment idea, you can expect to make steady profits.

summary

How was it. Did you get a concrete image of system trading?

System trading is an operation method that “mechanically repeats transactions according to investment ideas that have continued to make profits in the past.” Once you find a good investment idea, all you have to do is follow it. You can expect to make steady profits by repeatedly buying and selling stocks.

No discretion (intuition) is required, so even beginners can use it. In addition, it does not take much time, so it is an easy-to-practice operation method even for busy people. Please check the past data and find a good investment idea.

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