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Computerized Investing > July/August 2000

Building & Testing a Trading System

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by Wayne A. Thorp, CFA

To some, “trading system” is an intimidating term. However, simply put, a trading system is one or more indicators or criteria used in a systematic fashion to generate buy and sell signals for a given security. A trading system can be as simple as buying when the price of a security goes above a moving average line and selling when the price dips below the moving average. The complexity of a trading system is bounded only by the user’s imagination.

Beyond indicating when to buy and sell a security based on a set of indicators, trading systems play perhaps an even larger role in investing—they take emotion out of the equation. Well-defined trading systems make the buying and selling process automatic, without the need for subjective decision making on the part of the trader. However, the emotional separation is only possible when you have complete faith in the system and trade it unflinchingly.

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