One of the premier destinations for systems traders is the collection of E-mini futures contracts offered by the Chicago Mercantile Exchange (CME). Featuring products based on the leading equities indices, metals, currencies, and energies, the E-minis offer countless opportunities.
For traders who develop a viable E-mini trading system, engaging this collection of exciting markets can be a lucrative enterprise. However, markets are dynamic in nature―what worked today may not work tomorrow. As a result, it’s imperative that you be able to evaluate and retool the trading system to keep it operating at peak performance.
The Ins and Outs of Systems Trading
Achieving longevity in the financial markets is no easy task. Subsequently, many traders rely on a robust E-mini trading system as a way of sustaining long-haul profitability.
A trading system is a rules-based approach to the marketplace. Strong systems clearly define the following basic tenets of trade:
- Market entry: A trading system provides the user with trading signals, or queues on when favorable conditions exist in the market. When a signal arises, it’s up to the trader to decide whether or not to execute the trade.
- Position management: Knowing when to exit an open position is a key part of making money in the markets. Profit targets, stop losses, and advanced functions such as multi-bracket orders are approaches that traders frequently use.
- Risk vs. reward: Quantifying risk is a critical part of any trading system. Defining position size, risk vs. reward ratios, and money management on a trade-by-trade basis are integral system functions.
A comprehensive E-mini trading system includes rules that govern each of the above items. It may be algorithmic, automated, or even discretionary in nature. No matter the basis, you must follow the rules religiously; if you don’t, your system will cease to exist.
E-mini Trading System Management
In order to profit over the long haul, you must ensure that your E-mini trading system is operating at peak performance. Doing so means regularly taking inventory of your system’s efficacy.
Over time, the advantages of a specific trading system have a tendency to break down. This phenomenon is known as edge decay. Depending on the strategic parameters of the system, edge decay may occur for a variety of reasons. Undue latencies, evolving market conditions, and incongruencies between risk and reward are some of the common culprits.
To avoid the pitfalls of edge decay, here are a few areas of system management that you should consider routinely scrutinizing and questions to ask as you do so:
- Is the trading strategy relevant to the evolving market?
- Are risk and reward in alignment, or is market state undermining the integrity of the system?
- Resource Inventory
- Do available resources complement stated objectives?
- Is there enough capital available to trade the system properly and safely?
- Technology Maintenance
- Are the internet connection, computing power, and software platform operating at peak levels?
- What, if any, undue latencies exist? Do slippage and unfilled orders frequently hamper profitability?
- Comparative Performance
- Does the system perform well across a sample of unique products?
- Are executed trades producing historically “normal” profits and losses, or do results appear random? If the latter, how large is the variance?
No matter what type of E-mini trading system you have, at some point it will likely falter. Even the most sophisticated black-box trading systems have a limited shelf life before an overhaul is needed. However, given the proper attention, it’s possible to preserve the strength of your system for weeks, months, and even years.
Interested in Becoming a Systems Trader?
In one form or another, systems trading is a popular way of engaging the futures markets. Whether your system is algorithmic, automated, or fundamental in nature, rules-based methodologies can provide you with a structural framework that promotes consistency.
To learn if systems trading is right for you, download your free copy of Intro to Trading Systems, courtesy of Daniels Trading. In it, you’ll find practical answers to both elementary and advanced questions related to systems trading.