Over the last five years that I’ve been trading, I’ve constantly wondered which trading method yields the most success: trading a system, trading on intuition or mixing both together.
To answer this question I’ll document my personal experience, as a short-seller with TradeZero, over the last five years. But for a snapshot glance to see what the majority think, here’s my Twitter poll results.
Out of 224 responses, from mostly day-traders, it is believed that following a system only, or, trading a system with intuition, is the most effective way to trade. Very few, trade exclusively on intuition.
What is a trading system?For many people this can vary, it depends on how complex you want your system to be. You can read about system trading here or see part of one of the first systems I made below - it was basic but incredibly effective.
Some of the basic rules/criteria outlined (above) to create my system, for example, were:
- I’d short only stocks gapping up more than 25%.
- The pre-market and opening volume determined the time of my entry execution.
- If the stock did not break down by 10:30, I’d take off the position or let it hit my stop and be done for the day.
To give context, the majority of gappers in 2020 failed. I had excel-tracked data to see when and how they failed, based on volume. In 2020, I turned around $600 into $66k – 10,000% ROI just by following this simple system.
So what went wrong?
At this rate of growth, I’d be a millionaire in 2021, so obviously something went wrong. In 2021, volume piled into the market like never before, mostly due to new traders. I’d guess, spurred on by commission-free trading and the corona virus, allowing many to work from home – meaning they had more time at their disposal.
Ultimately, the system stopped working. My reaction was to fight, leading to losses, giving back a good start to the year.
After my system failed me, I moved to intuitive trading. Before trading each stock, I’d ask a series of question to gauge a ticker’s strength, first:
How strong is the market? What’s the news? What’s the float? What’s the sector? What volume is forecasted to trade?
Then, I’d trade price action based on feel, whilst giving consideration to the answers in question. This sadly, also did not work.
I’d make random predictions, trade too many random set ups and fall victim to a lot of market-maker manipulation. This random trading delivered random results.
Re-visiting system trading
Looking back, in hindsight, I’ve learnt that if your system stops working you should size down until you fix it, at the very least. Find out the errors, or make a new system.
Here’s a snap-shot of part of a new system I’m building, that utilises a lot more criteria, to ensure I stay safer in a more volatile market.
Sometimes I’m not good at cutting losses, so I also require a system I can optimise without watching the markets endlessly, to avoid getting emotionally sucked into trades – this is also in the works.
Sometimes, you may see a stock basing/consolidating or a squeeze about to potentially occur based on your intuition. If that’s the case, I understand how it could be an added benefit to over-ride the system.
Lastly, I’m directly comparing my profits with tracked data, to see which variations of the pattern are over and under-performing. Or, to see if there’s an error in the system I’ve missed.
And that’s where I’m at, after a great 2020, let’s say I’ve unearthed some flaws and learned a lot of lessons in 2021, so here’s to a great 2022.
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