What is a Systems Trader?
A trader who utilizes systems to determine the timing of purchases and sales, rather than rely on a personal assessment of market conditions. (Jack D. Schwager – Market Wizards .)
To a great extent, the story of systems trading in Forex has moved in sympathy with the technological revolution that began in earnest over 50 years ago, embracing computers and communications.
Indeed, the markets themselves have relied on this ‘revolution’ for their very existence. Depending on information communicated at electronic speeds, it was only in the 1970s that currency futures were born, expanding the commodity futures list.
How It All Began
Jesse Livermore, most famous of all traders, was immortalised in Edwin Lefevre’s book, Reminiscences of a Stock Operator , which was published in 1923.
Livermore was a complex character, whose most outstanding achievement was the $100 million profit he made on the 1929 Crash. Livermore advised traders to use a system, and to stick to it. This is the fundamental tenet of the systems trader. So arguably, Jesse Livermore can be credited with planting one of the vital seeds of system trading, even if he was not exactly one of the founding fathers.
In those early, far-off days, the pace of life and availability of information, both as regards quantity and timing, were on a totally different scale. Number crunching was a tedious business and relied on pencils, pens and paper, log tables, ready-reckoners and slide rules. Yes, people actually used these things.
After World War 2, calculating machines began to appear, and Marchant and Friden machines could be seen sitting on desks in the accounting offices of larger companies. Each machine cost as much as the annual salary of the clerk who operated it.
But this could never be the stuff to satisfy the needs of the emerging systems trader. Computers were just round the corner and these would be the enablers that were needed. The first computers sneaked out in the 1950’s with little operating software and no application software.
In 1963, when Richard Donchian, the accepted father of trend following, began to write his weekly bulletin Commodity Trend Timing , commercial computers were rapidly establishing themselves in their elite purpose built air-conditioned environments.
IBM was transforming from a punched card tabulating machine manufacturer towards its destiny as the massively profitable Big Blue of Industry and Commerce. The price tag on a new computer could be tolerated without wincing only by the most hardened financial professional and comprehended only by an astronomer.
But soon, in 1970, Ed Seykota would find himself in the privileged position of being able to lay hands on one of these outrageously expensive machines. Still a punched card guzzling animal, it was capable of being programmed and capable of producing results fast enough for them to be useful.
Ed Seykota was trying to prove a point – that you could produce a set of rules for trading commodity futures that would enable you to make a profit. Seeing was believing and Ed made his point, to himself at any rate. This was real systems trading for sure. Seykota’s bosses did not appreciate the full significance of what was being achieved and were unable to follow the system! They couldn’t resist second-guessing it. What had happened to that precious advice that Jesse Livermore handed down?
Later that decade, in 1978, star trader Richard Dennis decided to move from the pit to become a desk trader. This would put the cat among the pigeons!
By now, desk monitor screens were commonplace, linked into main frame computers. The more wealthy futures trading firms were able use computers and test their ideas. Richard Dennis developed a mechanical system for this purpose. Dennis was the man who had the foresight to realise that trading futures could be taught. It was not, he claimed, a mysterious God-given art.
Bill Eckhardt, his partner, was incensed by Dennis’ blasphemous assertion and after heated argument and firm wager, it was put to the test. In 1984, the two partners decided to recruit a batch of trader-trainees, who would be taught how to trade futures. Whatever next?
Could futures trading be taught? Would system trading work? What would Forex brokers do?
In the space of just a few weeks, under the label of the Turtles , 10 selected student traders became the world’s very first ‘production batch’ of systems traders. The Original Turtles had hatched.
That same year, IBM produced the first Personal Computer. In relative terms it cost about ten times as much as today’s machine and had about one thousandth of the disk storage capacity of a modern PC. Of course, there was no software with it and there was no software for it – anywhere. Déjà vu.
The Turtles’ outstanding results declared their success and proved Dennis right. Yes, it was possible to teach people how to trade commodity futures. Curtis Faith the most successful Original Turtle, produced staggering results.
The following year, another batch of Turtles was recruited and the scientific method of system trading was further strengthened .
The Pace Hots Up
After Tim Berners-Lee invented the World Wide Web in 1991, the pace of the technological revolution began to accelerate at a tremendous rate. The first of a rapid succession of fast modems came on the scene as the man-in-the-street rushed to get on-line.
In 1992, the Metastock real-time price software product appeared, bringing the immediacy of markets into the home. For those who wanted live information, price charts for stocks, shares and commodities were on their very own PCs.
The first Internet browser was born in 1993, enabling millions of latent Web Pages to be ‘surfed’. Although there were a vast amount of valuable pages on the Web, it was clear that by far the greatest proportion was rubbish. And there was almost no way to separate the good from the bad. Keen surfers were swallowed in trashy irrelevance.
In 1994, the release of Trading Recipes, a testing harness program, began to swing the balance of opportunity towards the smaller trader. The man of modest resources could now aspire to become a successful systems trader, by virtue of being able to test his systems.
Since 1995, Altavista had been the best search engine available but in 1998, Google changed the world when they produced their amazing product. By consigning rubbish pages to the ‘land-of-never-to-be-seen-again’ the quality of searched information rose immediately. The World Wide Web was now really useful rather than potentially useful.
If it ever existed, the Millennium Bug came and went – and progress continued unabated.
In 2003, a major advance in system trading was made when Original Turtle, Curtis Faith, released Veritrader the trading/testing harness. Designed and written by traders, for traders, Veritrader was of quality beyond anything seen previously.
The same year witnessed the general availability of ADSL broad band data transmission services. This enabled delivery of high data volumes at ‘moving picture’ speed into the home, over traditional copper telephone lines. The on-line home will never be the same again.
Another development in system trading in 2003 was the arrival of the robo-broker. Now you don’t even have to trade your own system – your robo-broker will code it up on his own computer and run it all for you!
The arrow of time continues to pierce the future and 2004 is already partly history. The story of system trading continues to unfold as we report that the MODUS System Trading Course has been produced by David Bromley, pupil of Ed Seykota. It is intended to help those who wish to learn how to trade commodity futures successfully.
For certain, there will be more exciting things to come this year and this page will continue to record the On-Going Story of System Trading.