Systematic Trading Rules

A TRADING RULE IS A SYSTEMATIC WAY OF PREDICTING PRICE movements. Trading rules are a core component of any trading system, so how can you find trading rules that will work? Why do they work? What styles of trading are available? Finally, how successful should you expect trading rules to be?

It is carefully built from ideas or data

Systematic trading assumes the future will be like the past. Hence you should create rules that would have worked historically, and hope that they will continue to work. But there are at least two different ways to find rules that made money in the past. One common method, which I call data first, is to analyse some data, find some profitable patterns and create some trading rules to exploit them. This is sometimes called data mining. The alternative, ideas first, is to come up with an idea, then create a rule, which is then tested on data to see if it works.

Intuitively understandable behavior

A strategy that is intuitive is much easier to trust. If in advance of an earnings announcement you see Unilever ought equity price rising a trend following system to be buying. If the strategy sold instead that might be a cause for concern and you would check for bad data or software bugs. Usually though you’d see what was expected and be able to relax. A complicated system might buy or sell when prices moved higher, depending on the exact pattern. This would make its behavior less obvious and more unpredictable.

Can be systematized

Ideas need to translate into systematized rules. Not all styles of trading are entirely suitable for this, because they are inherently subjective or because of data limitations. They can still however be wrapped up inside a systematic position management framework, as I show in the semi-automatic trader example.


When computers have a significant advantage, as in ultra-high frequency trading, they have squeezed out people almost entirely. These are no longer taking advantage of human weaknesses or market structure, but are engaged in an arms race where success comes from pure speed and anticipating your opponent’s reaction. This area falls entirely outside the domain of this book

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