Traders participate in the financial markets through the frequent buying and selling of stocks, futures, forex and other securities, and  are often categorized into two broad groups: discretionary and system. Discretionary traders are decision-based traders who scan the markets and place manual orders in response to information that is available at that time. System traders, in contrast, are rules-based traders who use some level of automation to employ an objective set of rules, allowing a computer to both scan for trading opportunities and handle the order entry activity. Here, we explain system trading and describe a typical day in the life of a system trader.
System Trading
System traders either employ proprietary black box trading strategies, or design and test their own systems that are designed to execute trades automatically. Black box systems utilize pre-programmed logic to generate and act upon buy and sell signals. Users cannot view the system's code, but do have access to historical performance reports and may be able to adjust certain inputs to fine tune the product.

High frequency traders (HFT), who today account for about half of stock trades in the U.S., are system traders who employ sophisticated automated trading systems to exploit market inefficiencies and place hundreds of trades each session.
Traders who build systems from scratch begin with an idea and complete a process that includes backtesting, optimizing and forward testing to develop a viable system that is ready to be put in a live market. In the case of both black box and custom systems, traders rely on some prior performance to gauge how best to use the system.
Both black box and custom trading systems use the computer to scan for trading opportunities and place and manage trades. As a result, system trading offers many advantages including:

  • Minimized Emotions - Since the computer handles the trading activity, the trader cannot overtrade or second guess trading signals.
  • Consistency - A big challenge traders face is to "plan the trade and trade the plan." A trading system could be very profitable, but if the trader is unable to stick to the plan, it can quickly become a losing system. Automated trading systems enable traders to achieve greater consistency by acting on every trading signal.
  • Improved Speed and Accuracy - Computers are faster and more accurate than humans and can respond immediately to changing market conditions. For traders, and especially very short-term traders, a second can mean the difference between a win and a loss. Computers also eliminate the risk that an order will be entered into the market erroneously or incorrectly.
  • Diversity - Automated trading systems allow the user to trade multiple accounts, strategies and instruments at the same time, providing diversity that can help spread risk. What would be impossible for a human to accomplish is easily handled by a computer in a matter of milliseconds. 

    Before the Trading Session
    Before the trading session begins, system traders are busy checking the technical components of their trading systems (note: for U.S. equities markets, the session begins at 9:30 a.m. EST; other markets trade round-the-clock, and the "trading session" could be any time at all depending on the chosen market). System traders rely on computers and software to scan the markets and place orders, so it is vital that every piece of technology - be it hardware or software - is working perfectly. As a result, before each session system traders will check:

    • Computers and peripherals (monitor, keyboard, mouse)
    • Trading platforms and order entry interfaces
    • Trading system code - the computer program that monitors and places trades
    • Connectivity - power, telephone, Internet, broker, exchange 

    If everything checks out, system traders continue to prepare for the trading session, readying their trading platforms by:

    • Opening the platform and order entry interface
    • Loading workspaces and charts, with the correct symbol and timeframe
    • Applying any technical indicators or other trading tools onto the charts
    • Enabling the automated strategy that will monitor the markets and execute the trades 

    During the Trading Session
    With all systems go, the trader now monitors the markets, watches the news and waits for their computer to start trading. While the trader sends a quick "hello" to members of a trader chat room, the trading platform sends an audio alert stating "ORDER FILLED!" to signal that a trade has been entered. As the trader's attention moves to this trade, a second "ORDER FILLED!" alert lets the trader know another position in a different symbol has been entered. The trader sits up straight and scrutinizes the profit/loss ratio (P/L) that appears in the order management window. Game on.
    In two positions now, the trader watches to see if the trades will reach their goals. The first trade comes within one tick of reaching its profit target only to fall back. Rather than closing out the position for fear of it turning into a loss, the trader trusts the system and lets the trade play out. Eventually, price rebounds and the trade is automatically closed at its target price.
    The second position remains open, and the trader continues to monitor the P/L.

    Glancing away to view a market news headline, the trader finally hears the "PROFIT TARGET FILLED!" alert to signal that one contract has been taken off for a profit. At this point, the second contract will be at least breakeven, and the system will use a trailing stop to try to maximize profits by catching a trend. Just as this trade is closed at a small profit, the trader hears the "ORDER FILLED!" message once again, alerting that a third position has been entered. The system trader continues to supervise the trading activity throughout the session, keeping an eye on the open positions and monitoring the automated strategies.
    After the Trading Session
    At the end of the trading session, the system trader reviews the day's trades, making sure that all positions were executed according to the system's logic. The trader looks at the day's P/L, and knows that a net win or loss today isn't important, so he or she neither celebrates a gain nor cries over a loss. The system trader knows that it's what happens over time that matters.

    Next, the trader reviews the system's performance metrics to evaluate how the system has done this week, this month and this year, making note of any significant deviations from how the system should perform (its expectancy). The performance report includes an equity curve that shows how the system has performed – as a dollar amount – over time. The system trader always keeps an eye on this metric, since unusually large drawdowns could signal that the system is no longer working and needs to be revised or scrapped altogether.
    After taking a long break to get some exercise (healthy body, healthy mind!), the trader returns to the office to research a new trading idea, writing the code and backtesting the idea on historical data. Showing promise, the trader performs optimizations to improve the results, being careful not to over-optimize or curve-fit the system. If the idea still shows promise, the trader will continue the process of testing: backtesting on in- and out-of sample data, and forward performance testing (often called paper trading).

      In this way, the trader can find out if the system works only on a limited amount of data (the historical price data on which it was backtested), or if it will be profitable in a live market.
    The Bottom Line
    System trading is a rules-based trading methodology in which traders rely on computers to monitor the markets for trading opportunities and execute trade orders. This strategy automation boasts many benefits, including the ability to minimize or remove emotions, improve order entry speed and precision, and the option to spread risk over multiple instruments.

    Each day, systems traders may divide their time between actual trading – monitoring the system in the markets and system development – developing, backtesting, optimizing and forward testing to create viable and high-probability trading systems.