George IV - How to trade George IV or any other mechanical trading system

Let me answer this question in a general way, so what I say may be applied to other mechanical trading systems as well, be it futures, Forex, or stock trading systems. The instrument really does not matter. Nor should whether the system is day trading, swing trading or position trading in nature. I will do this in several points.

0. I am not a trading advisor, so do not treat this as any sort of advice, as legally I am not allowed to provide one. My business is educational in nature and not advisory, which implies not only that I cannot act as an advisor, but a host of other things as well. For instance, all the results on this site are reported as hypothetical, even if they may not be. But that's another story. The point here is that there are limitations on what I can provide, and I would like to use this opportunity to emphasize it as many people who contact me seem to be somehow unaware of it.

Also, I do not trade this system nor any other mechanical system. I prefer discretionary trading and for that I use KING. However, I find George IV very useful for giving me the general trend direction in which to trade. It can also serve as an indicator of good volatility. On days this system works, I can do very well, better overall than on other days, so I do pay attention to it.

It is up to you to trade this system or not. If you do so, you are responsible for all the actions that result from this decision.

What follows below is suggestions. I believe sound ones and rather conservative.

1. It is advisable to trade more than one mechanical system to manage drawdowns effectively, for instance to trade a porfolio of at least 2-3 mechanical trading systems, that are weakly correlated, even better 2-3 systems per each of 2-3 different markets, ideally weakly correlated. It is for this reason that trading George IV alone is not optimal since the optimal approach is trading more than one system as I just said.

2. The best way to start trading this or any other trading system is when it is in a drawdown after suffering 2-3 losses in a row.

3. Every system has drawdowns and their magnitudes are unpredicatble. You are on the mercy of Mr. Market and he can be mad and cruel. However, it is probably wise to stop trading a system when it has developed a drawdown that exceeds the previous maximum drawdown by a factor of 3. If this happens, it suggests that the market has changed too much for this system to trade it well. Of course, the system can rally back and even hit a new equity curve peaks, but suspending its use is a sound measure to avoid even greater losses. George IV's maximum drawdowns (between peaks in its equity curve) in recent times (2014) were pretty small: 9.0 pts in ES and 119 pts in YM. Being quite low, they may not be very representative of the system overall performance. Older data (for ES) gives the largest drawdown of 30 pts, which seems more resonable, and still rather manageable.

4. You need to stick to this or any other system for a longer haul, many months if not years as long as it performs reasonably well. Do not abandon it after a few losses or a few poor weeks; that is not how you trade mechanical systems. Mechanical trading is a bit like investing in that a longer time perspective is needed. If this is something you cannot accomodate, discretionary trading is a better option (see KING, again).

What I said above, I also said in many other places on this site, probably not all of it in one place, but I think that this brief summary of how to approach trading mechanical systems is still useful. I don't mind repeating myself if this serves a useful purpose.

Posted on January 31st, 2015.