Systematic trading refers to the process of buying and selling financial instruments, such as stocks, futures, currencies or commodities, using a predesigned and backtested trading strategy called a trading system. Most trading systems are developed using some form of analysis which tracks either price or volume or both, i.e, using technical analysis though there are some systems which use fundamental analysis.

The opposite of systematic trading is called discretionary trading, in which the trader makes buy and sell decisions on a trade-by-trade basis. Normally the sole job of the systems trader is to follow his system in total, while the discretionary trade may alter or choose his strategy depending his analysis about the state of the market.

One of the most significant benefits of systematic trading is that it helps to avoid the classical psychological errors inherent in any human decision making: to hang on to losing positions hoping they will turn favorable, to open positions out of boredom or desperation even when the analysis parameters are not met etc. Systematic trading removes emotional decision making from the trading process. When real money is at risk through actual trades in the markets, the rollercoaster of fear and greed can easily overwhelm rational decision making. A trading system does not have any emotions and hence the decisions are objective and in line with the strategy. Because systematic trading strategies are typically written in specific rule set, they can be tested on historical data. This ability to back-test a trading strategy with the same rule set is one of the biggest benefits of systematic trading.

Backtesting tells you how well the strategy would have done in the past. While backtested performance doesn’t guarantee future results, it can be very helpful when evaluating the performance of potential strategies. The backtested results can be used to eliminate strategies that either don’t suit your trading style or are not likely to meet your performance goals. Traders new to systematic trading often question whether the systematic approach can be profitable. They sometimes believe that discretionary strategies using different indicators/strategies as and when required can be better in the long-term.

The reality is that professional traders, such as hedge funds , prop traders and HNIs, have been trading their own and customers’ money profitably for many years using trading systems. These professionals, whose trading records are audited and who survive on their trading profits, have demonstrated for decades that systematic trading can be profitable.

One of the most famous examples of systematic trading are the Turtles. A bunch of ordinary people with almost no background of trading were taught in two weeks a set of rules on which to trade. Following those simple rules, they made millions for themselves and their clients, resulting in their names being part of the market folklore.

Adam Felsman; Mechanical Engineer, Cryptocurrency and Stock Trader


Twitter: @trends_trader

Email: [email protected]

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