In the capital market, successful traders do not trade frequently, but those who have a defined strategy and trade in a disciplined manner are considered successful or systematic traders. They do not overtrade; they focus on disciplined and systematic trading strategies.
In today’s blog post, we will give you an overview of systematic trading, along with how to become a systematic trader.
What is Systematic Trading?
A systematic trading is a method of trading in which a trader executes their trades based on a predefined set of rules and strategies, instead of any guesswork or emotions. Traders prepare a fixed rule based on which they enter into a trade and exit from it. Their risk is also decided in advance. The main objective of systematic trading is to maintain discipline, consistency in trade, and risk management. The systematic traders do not rely on emotions to execute their trades.
How to Become a Systematic Trader
To become a systematic trader, one can follow the steps mentioned below:
1. Learning the Basics of the Stock Market:
To become a successful systematic trader, the first step is to learn about the basics of the stock market. The basic learning about the stock market includes understanding the exchange operator, types of orders such as market order, limit order, etc. Therefore, a systematic trader must understand the market movement.
2. Type of Trading
To proceed further, one is required to choose the type of trading based on their need and investment profile. The common types of trading include swing trade, intraday trade, scalping, etc. Each type of trade has a different type of holding period, ranging from a few seconds to a few months. And there are key requirements for every type of trade, including macroeconomic conditions, real-time data analysis, etc.
3. Creating Strategies
The next step is to define a trading strategies which include technical analysis. The strategy must include an entry point, an exit point and a stop-loss. Strategies generally based on various technical tools, including MACD, etc. These are pre-defined levels at which a trade takes a position or exits a position.
4. Risk Management
Before executing any strategy, one is required to define the stop-loss and avoid overtrading. One should define the maximum loss which they can bear per trade. Also, it is advisable not to put all your investment in one stock or sector.
5. Backtesting
Once the strategies are framed before executing them in the real market, one can backtest them using the historically available data. There are various platforms which can translate your strategy into logic, and you should test it in real market conditions.
6. Paper Trade
Along with the backtesting of data, one can also use their strategy using a paper trading account. This helps in understanding execution, improving discipline, etc. This validates your strategy and how it works in real life. It also allows an investor to understand the execution challenges.
7. Regular Improvement
The market dynamic changes over time, and a trader is required to review and improve their strategies regularly. Generally, the performance can be reviewed monthly and must be changed to adapt to the market volatility.
Example of a Systematic Trader
There is a trader named Mr. X who is often known as a systematic trader, because he follows a simple strategy and trades only on his defined strategy. He has defined trading rules, which are as follows:
- He only purchases a stock when its 20-day moving average crosses above the 50-day moving average.
- Stocks with high trading volume are considered by him.
- He always keeps a stop loss of 2%.
- Mr X’s profit at 5%.
On a particular trading session, Mr X identifies that the stock price of a particular stock meets all the defined conditions and is currently trading at 1000 INR. And based on his strategy, he entered into a trade keeping the following parameters in mind:
- Entry Price – 1000 INR
- Stop Loss – 980 INR (2% below Entry)
- Target Price – 1050 INR (5% Above Entry)
As he is a swing trader, the stock price reaches his target price in a few days, and without any greed for additional profit, he exits his position. However, if, on the other hand, the stock price falls, he might exit the position at the defined stop loss.
This is known as systematic trading, as every trade is based on the pre-defined rules and strategies, and there is no emotional bias.
Difference between Systematic and Non-Systematic Traders
The key difference between a systematic trader and a non-systematic trader is as follows:
| Particular | Systematic Trader | Non-Systematic Trader |
|---|---|---|
| Approach | Systematic traders follow predefined rules and strategies. | These types of traders execute their trades based on emotions, random decisions, and instincts. |
| Decision | The decisions are made based on the analysis of data and logic. | A non-systematic trader makes emotion-driven decisions. |
| Entry and Exit | Systematic traders have pre-defined entry and exit. | Non-systematic traders trade without fixed entry and exit plans. |
| Backtesting | One can easily backtest their strategies based on historical data. | Non-systematic traders generally do not backtest their strategies. |
| Consistency | They focus on long-term consistency. | The results of non-systematic traders are inconsistent. |
| Discipline | Systematic traders are highly disciplined in nature. | Non-systematic traders frequently change their strategies; they are not considered disciplined traders. |
| Overtrading | Systematic traders generally do not overtrade. | Non-systematic traders often take unnecessary trades. |
Conclusion
On a concluding note, a systematic trader does not trade based on predicting the market based on emotions, etc., rather, they use a disciplined, rule-based approach to generate profit. They focus on logic, data, and risk management; therefore, they are often considered successful traders. However, systematic traders are also required to stay consistent with their strategies and evaluate their strategies based on market dynamics and change them accordingly. They can also automate their strategies using various automated trading platforms such as Pocketful. However, it is advisable to consult your investment advisor before making any investment in the securities market.
Frequently Asked Questions (FAQs)
Who are systematic traders?
Systematic traders follow pre-defined rules and strategies to trade in different securities. They also follow proper risk management and do not make any decisions based on emotions.
Can I backtest the systematic trading strategies?
Yes, you can easily backtest the systematic trading strategies based on the historical market data to evaluate the profitability and performance of your strategies.
Can systematic trading guarantee profits?
No, systematic trading does not guarantee profit; however, it only helps in improving discipline, reducing emotional mistakes, and avoiding overtrading.
Can systematic trading be automated?
Yes, systematic trading can be automated using a platform offering algorithmic trading and integration of APIs.
How much time will it take to become a successful systematic trader?
The time taken to become a successful systematic trader depends on the individual’s approach. Becoming a successful systematic trader requires consistency, discipline, regularly evaluating strategies, and risk management.
