What is systematic trading?

Systematic trading, algorithmic trading, trading strategy, trading system, trading model, mechanical trading system, automated trading system… If you are interested in online trading on the financial markets, for sure you’ve heard at least one of those terms. What all of them have in common is that they rely on a systematic approach to trading.

Systematic trading is a methodology for trading on the financial markets, based on a system of predefined rules

There is no single approach to systematic trading. Some trading systems are manual, while others are partially or fully automated. Trading systems based on technical analysis are most common, but there are systematic traders who use fundamental data or quantitative analysis for their trading signals.

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The Systematic Trading Process

Trading system development

The systematic trading process starts with an idea about a trading system. The trading system should have rules that define the entry and exit conditions to go in and out of the market.

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Idea
Simulation

Trading system evaluation

The second step of the process is to run a backtest of your trading system and see how did it perform with historical data. 

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Trading system optimization

During the optimization stage you are running additional backtest simulations in order to find the best set parameters for your trading system. 

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Optimization
Portfolio

Trading systems portfolio construction

In this step of you will learn how to create a portfolio of trading systems and benefit from diversification. 

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Money Management

Money management is the process of managing your trading capital. In this step you will learn how to set profit targets and quantify risk. 

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Capital
Go live!

Live trading

By this stage you should have several trading systems, bundled in a portfolio that are ready to go live. You should have also clear targets and set aside capital for trading. In this step you will learn how to prepare for live trading.

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Evaluation of trading results

You have gone through all the steps in the systematic trading process and finally have your systems trading. Is it time to open up a beer and head to the beach… Well… not quite yet. Before you get there you should make sure that your trading systems are behaving as expected.

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Evaluation

Start over

You have reached the end of the systematic trading process! Pat yourself on the shoulder. Enjoy how your trading systems do the hard work and trade 24/5 for you. 

It is time to roll up your sleeves and design the next trading system for your portfolio!

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Most Popular Systematic Trading Articles

Example trading systems portfolio

In the previous article, you learned why it is better to create a portfolio of trading systems instead of trading just one system. In the current post, you are going to see how the theory is applied in practice and an example portfolio of trading systems is created. We are going to illustrate the benefits of compiling a portfolio of…

Live trading

By now you should have your trading systems, bundled in a portfolio ready. You should have chosen a broker (or several brokers), opened an account and deposited the capital you set aside for trading. It is now time to go live with your trading setup. Trading platform setup The first thing you should do is install the trading platform of…

Choosing a broker: Part 5 - Trade execution

Trade execution is the last factor on this list, but this is because it comes after all the other factors, not because it is the least important. An important question that needs to be answered at this point is: Who takes the opposite side of the trade? In trading, in order to execute a trade, you need a counterparty. In…

Detailed trading system results check

If you've already performed a quick check of live trading system results and comparison between evaluation profile and live trading performance and still find discrepancies between your simulation and live trading performance it is time to dig deeper into the data and run a detailed trading system results check. Topics overview: Comparison between simulated and real tradesLearn how to compare…

Choosing a broker: Part 4 - Historical data and charts

In the previous articles, you already learned about broker regulation, the trading platform, and the trading conditions. Another topic we cleared earlier was that since the trading systems rely on historical data, you should be very careful when choosing your data source. Most of the brokerages maintain historical data with sufficient quality, but you should examine it before you commit to real trading.…