By ProfessionalTradingSystems.com

In this article I am going to share with you 3 core reasons why systematic trading strategies work well in real-time trading and why it is worth applying this approach comparing to the discretionary trading (which could be a lot profitable as well). Many traders and investors would agree that the 3 commons traits of the successful trading be it in stocks, commodities, Forex ect.  are –  (1) Methodology, (2) Money Management  or Position Sizing and (3) Psychology. Let`s examine each of them and ponder upon how systematic approach would improve them.

Check out your Methodology Before Putting Real Money

When your rules are 100% rule-based and don’t require trader`s interpretation you could check if your desired entries and exits had been profitable in the past. The research can be done manually looking at the charts or automatically if you have programmed a strategy code for particular platform like TradeStation or Metatrader 4 for example. Look at the chart below:

It represents simulated trading measured in R-multiple for 16 years trading for sideways type strategy intended for spot Gold market. It is clearly a losing systematic strategy. The long-term backtesting period is enough to convince us that this is not a valid strategy and there is no chance of future gains. The consistency of down heading equity curve is unequivocal. Because we were able to check the systems beforehand we have saved a lot of real money putting them into losing endeavor.  However, the logic of system sounded pretty solid and promising initially. Without backtesting we would have put real money in the strategy and for sure losing them all in a few months.

Now let`s take a look at the following chart which is trading system designed for eur-usd:

Consider its upward equity curve and how consistent it is. Again the backtesting period is 16 years and all trades are represented in R-multiple.  This is a kind of strategy to which we would put our real money. It is profitable we are confident that it will remain a winning one in the future because of the long-term backtesting period where the system has been thrown into different market phrases like big trends, quiet market and volatile sideways situations.

So, investing some time to check out our systematic trading system gave us a big advantage over discretionary traders who cannot check if their rules are working at all, even though they may sound very logical and promising on paper.

Limit your MaxDD using Money Management or Position Sizing

When you know your strategy`s characteristics you will be able to apply to it the appropriate position sizing formula. Suppose your MaxDD for the backtested period is 10R and you are a very conservative trader not willing to risk more than 10% of your trading account. Knowing in advance that your biggest drop in the equity curve it will make sense choosing a risk of 1% per trade which will limit your overall risk exactly to 10% assuming of course that the future performance will be similar.

On the other hand if you are an aggressive trader with big risk tolerance of 40%, then your obvious solution would be to put 4% on the table per trade.

As you can see it is possible to choose the right money management tactic for you because you have already a strategy’s characteristics which act as a base of your decision making process.

A discretionary trader could not know in advance how many loosing trades in a row or how big the MaxDD would be. There should be a certain time of real trading passed in order be taken an appropriate calculation of those metrics and thus choose position sizing formula which is best suitable. One may end up being too conservative or too aggressive trading your non 100% rule-based system.