The Bane of Automated Trading Systems

This has been a highly frustrating week. Since early August, I have been testing a new trading system using the futures portfolio. The results have been so encouraging that I was set to start trading real money this coming Monday and create a new portfolio on collective2.com the following week. As a systems trader, I only keep an eye on financial news. Since I don’t make trading decisions based on my opinions on the markets or geopolitical news, I only watch for events that would warrant a defensive stance. Specifically, I look for something that may have a large impact on various markets such that the direction is uncertain. This past week, there was ample news resulting in so much uncertainty, that I have decided to delay the implementation of my new system until the markets settle down. The main culprit was the European wide crisis heading to what appears to be a crescendo. This caused the US fed to open up swap lines with Europe to provide short term dollar funding. Additionally, the fed announced the addition of an extra day to a previously scheduled meeting this coming week. The problem from a trading perspective is that I have absolutely no idea what the impact on the markets will be, but I do think that there will be a substantial impact. Thus I take a Pyrrhonian skeptic point of view and “suspend judgement” (epoche).

As I mentioned in a recent tweet, one of the all time great traders, Bruce Kovner, is retiring. His interview in Market Wizards was one of the better ones and produced one of the more memorable quotes. He said, “To this day, when something happens to disturb my emotional equilibrium and my sense of what the world is like, I close out all positions related to that event.” This is why all traders should learn from the masters.

My decision to “suspend judgement” brings up the issue of government interference in the markets. Clearly the modern leviathan state has an enormous impact on the markets in its normal activities. However, what we are currently seeing is deliberate policies aimed at specific market outcomes. To quote a recent article by John Mauldin, “… Bernanke clearly believes that stock prices are a tool of monetary policy”. Mauldin then notes, “This next Fed meeting will likely produce a very interesting statement at its conclusion. If the Fed does nothing, you do not want to be long. If they go ‘all in’ you do not want to be short. Guessing what they will do is very serious business”.

In light of so much uncertainty, I do not feel comfortable unveiling a new trading system.

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