Systematic Trading Strategies

The term, systematic trading refers to a unique trading approach. Essentially, it is a mechanical kind of trading sans emotions. Perhaps that is the reason why it is also known as mechanical trading. It is a form of trading that has pre-determined risk controls and also well-defined trading goals. So with the objectives and risks well charted out, trading becomes automated to a certain extent too.

In this case, the rules of investment progress as per pre-determined norms. Moreover, investments and trading decisions also follow a pre-decided method. As a result, trading, in this case, is neither dynamic nor does it require constant monitoring. In many ways, you can call it a zero hassle trading, but at the same time, it is blindly following a trading system. Systematic TradingSystematic trading strategies are devised for a wide number of asset classes like stocks, forex and the like. The trading systems that they are made to follow are often coded as computer language and proceed as per computer algorithms.

So, then the trading can easily happen at the broker’s trading platform. This is quite different from the discretionary trading where the trader can keep a dynamic approach. Depending on the specific trend in the market, discretionary traders can also look at altering their trades. They can make changes daily, hourly and whenever required. But systematic trading strategies remain unmoved by all these movements.

Their job is simple; they have to only follow the system. The trading systems can be manual as well as automated ones using computers. Essentially these trading systems are based on technical data, but in some cases, they are also backed by fundamental ones. Strategies like high-frequency trading, quantitative trading are variations of systematic trading. Systematic trend following is another variation of this same strategy.

The Approach in Systematic Trading Strategies

Discretionary trading is a way more dynamic trading module. It helps you make alterations in your trading positions as per the market movements. But the only problem with this approach is that you have your emotions involved. So whether it is fear or greed, it is surely going to make a difference to your whole project. It may either lead to a lot of gains or huge losses, depending on the market. Perhaps that is the reason that systematic trading strategies are a better option. It benefits you in two distinct ways.

There are no huge spikes and gaps in the overall return ratio. At the same time, the degree of uncertainty is lesser in this type of trading. The risk controls too are much better enforceable in case of the systematic strategies. You have a system of fairly automated trades that operate at relatively high and even low frequencies. They use a gamut of mathematical formulas and algorithms to work out the systems. These models of trades are generally proprietary in nature and involve some strong risk controls too. The premise for most is cutting down the relative risk involved while maintaining the reward element. But as the entire program is created on the basis of rules, most of the action too is pre-decided. But before you go ahead with this strategy, you always have the option to work out the alternatives. You can undertake a certain amount of research based on rules with your older investments. The consistency of the results is what matters the most.

That in many ways forms the basis of the core strategy and how your portfolio progresses. So back testing a strategy is crucial before you put in real money. This works even for these systematic trading strategies.

Strategies Using Price Pattern

So, the price pattern gets a clear prominence in this case. The price pattern can convey just about any trend. It can be as simple as the closing high or the intra-day highs. It is also capable of indicating complex elements like reversal patterns or continuations. The price pattern in trading is often the first acknowledgment of any potential pattern. It identifies the why, how and when of price movements. Often the price pattern becomes the instrument of change in sentiment. For example, if there is a head and shoulder price pattern, it signals two smaller patterns around a big one. Double tops refer to short-term swings and failed attempt to breach earlier highs.

Double bottoms too refer to a short-term swing but towards the lower levels. As a result, here the second swing often refers to a failed attempt to break below earlier lows. So, in many ways, they become the primary indicator of not just a specific trend but overall sentiment too. In many ways that is where systematic trading strategies can trace their beginning and also the continuation.

It is the creation of a constructive trend identification system.

 The Moving Averages Crossover Strategy

When you look for the top systematic trading strategies, the moving averages crossover is one of the most popular ones. You already know how to determine the trend by plotting the key moving averages. You can already determine when a trend is likely to continue or end. Now supposing you add a few more moving averages and wait for the crossover. That is the moot point of your strategy. When the moving averages cross over one another, it signals a potential change in trend. So this may be your opportunity for a better or more profitable entry point.

Normally a crossover happens when a moving average for a shorter period moves above or below a moving average for a longer period. Of it crosses above, it is considered a bullish trend. However crossing below is normally a bearish trend.  There is a slightly more conservative take on it too. In this case, you don’t take extremely fast moving averages into consideration. Instead, you go for middle-level ones like 20-day average and wait for crossovers if any with even slower ones like 50-day averages. Primarily this trading system is based on analyzing the time period of the two moving averages that are crossing over.

This system also includes the moving average convergence divergence indicator. Even the triple moving average crossovers are part of this same systematic trading system. In many ways, it takes into consideration the difference between two primary moving averages. That is how you can get a clearer idea of the points where the trend is set to close. As a result, it keeps the basic tenets of systematic trading in place and returns too. Be it in terms of the mechanical nature of undertaking the trade or exercising control on risk.

Identifying Support & Resistance

Forget about systematic trading, any type of technical trading is primarily based on the fundamentals of support and resistance. They form the backbone of all types of technical analysis. This is because they are a representation of the floor or ceiling for any type of stock or forex price. The support refers to the lower end of the price band while the resistance is the higher end. The concept of trade here is based on the fact that any stock price will have difficulty in crossing either of the price bands. It may be breaching above a specific level or falling below a particular floor price.

As a result, trade is normally limited between a certain range. But when the stock does break above a resistance level, it becomes the floor or the point of support. Similarly, if the slump in so deep that the stock slips below the support zone, it creates the new resistance for the stock. There can be a variety of factors that determine the support and resistance zone. The primary trigger, in this case, can be anything from economic factors to stock-specific issues. Essentially these support and resistance zones become the foundation for identifying the trend.

They help create a trading system. As a result, they are the most important aspects of systematic trading strategies. They help in finalizing the broad trend and how the technicalities linked with it operate. Another interesting aspect of this trading strategy is the ease of creating an automated trading system. Once the resistance and support prices are established, you do not need anything else to create a trading system. Profit booking and stop loss levels can be set up as per these. As a result, trading then goes on the auto-pilot mode.

Channel/Volatility Breakout

Whether you are looking at channel breakout or volatility breakout, they are both based on the concept of looking for a specific trend. As the term, systematic trading strategies indicate, it is all about creating an order or looking for a system. The market is uncertain for sure, but prices, in general, follow a specific trend. The volatility breakout and the channel breakout are all price dependent. So the pricing becomes the primary basis for creating a trend. In the case of channel breakouts, a price channel is identified. This basically takes into consideration the highest high and the lowest low.

You get a trade signal if the market breaks below lowest low or above highest high. Now just the highest high and the lowest low may stretch over an indefinite period. But that cannot put a system in place. That is why these price channels consider specific time periods. Normally this channel is calculated over a 20-day period. The systematic trading system takes these channel breakouts as their trend identifiers. This is how a holistic trend comes into being and becomes an essential part of a system. Volatility breakout is similar to channel breakout in some aspects. But in this case, the trend is based on the volatility breakout.

Therefore, the average true range of an entity helps determine the volatility. Normally this ATR is an average of the range seen in multiple price bars. It is then added or subtracted from the current bar price. That is what gives the exact volatility breakout. The advantage in both these cases is that the price range under consideration is changeable. The time period depends on the duration that the trading system determines. So, this again works on identifying the pattern.

Strategies Using Volume

So far we concentrated on price pattern and systematic trading systems created by identifying pricing trends. But the prices are not just the single source of identifying long-standing patterns or systems in the market. There is another factor that works in tandem with the overall pricing. Yes, I am referring to the overall volume movement in the market. The volumes too form a crucial part of the market moving fundamentals and triggers for price movement. Volume essentially refers to the total quantity of a stock or currency that is traded at a specific time.

That is why you have intra-day volumes, closing volumes, total turnover, 10-day volume and the like. Just like pricing, here the volume becomes the indicator of sentiment around the particular entity. Often the volume becomes the instrument to validate a certain phenomenon in the market. It becomes the standard option to identify value pockets and general sentiment. This is exactly why you will see blue-chips and popular midcap winners showcasing strong volume performance.

The volume is often the market’s way of authenticating a trading call. Therefore, when you are talking of reliable systematic trading strategies, the volume becomes a crucial factor. It underlines the value elements all around.

Fundamentals of Forecasting

Now so far when we were discussing systematic trading strategies, we primarily dealt with technical indicators. Given the nature of these mechanical strategies, technical indicators do play a key role in enabling hassle-free automation. After all, technical indicators are not emotion-driven, or they do not have any emotional bias. It is a straightforward price movement that is taken into consideration. But that is not the only way to put a trading system in place. There are many other mathematic alternatives to this too. These are broadly bunched together as market forecasts.

Mathematical formulas are often used to predict certain market trends in future. This is more of a qualitative analysis of the market sentiment. These are primarily meant to identify future possibilities and potential. So if the forecast is that the markets are set to move higher in the next two weeks, a systematic trading strategy will be to buy it now. The crux of the forecast is essentially devising ways to use it for creating a trading system. That alone is what holds the overall trend in place in a constructive way. So forecasting too is an important element in devising systematic trading strategies.

Why Do Systematic Trading Strategies Work so Well?

So, there are some distinctive and pointed reasons why systematic trading strategies work well.

1. Cuts out Emotion

First and foremost, your trade is dictated by a system or a formula. There is neither fear nor greed that plays any role in your market call. You are not even influenced by your peers or any friend or family. Your trading system moves forward blind-folded oblivious of any specific phenomenon. All it identifies are numbers, levels, stop losses and margins. So trade continues in an uninterrupted fashion for the most part of the trading tenure.

2. Better Trading Discipline

This immediately introduces a significantly higher degree of trading discipline. Once you get a signal from your trading system, it is clear; you cannot ignore it or miss it. Trading is as much passion as it is discipline. There is no room for distraction or detractors. With systematic trading strategies, it is rather simple to institute.

3. Limit Your Position

Often the key reason for huge losses is overleveraging more than a bad strategy. The systematic trading strategies work exactly on this factor. They help you in maintaining your financial prudence and taking logical and rational position calls. When you already know that by choosing 1% risk, your net risk potential can be capped at 10%, why will you take any more risk? A discretionary trader will not have prior information of a total number of consecutive losing trades. But you don’t have to end up being too conservative or aggressive; you can take a balanced view.


Therefore, it is not wrong to conclude that you can improve your successful trading trait with systematic trading strategies. It gives you a means to filter trades and put a cap on the risk potential. It gives you a psychological edge in terms of dealing with emotions and maintaining trading discipline. So if executed properly, you can lock in definitive profit with systematic trading strategies.

0 0 votes
Article Rating
Categorized as Trading

By The LuckScout Team

I don't believe in luck. I believe in sweat. The more you sweat, the luckier you get.

Notify of
Oldest Most Voted
Inline Feedbacks
View all comments
Would love your thoughts, please comment.x

New Report