A BEGINNER’S GUIDE TO SYSTEMATIC TRADING

Trading is a big part of our lives, whether we’re directly involved in it or not. Since the entire trading industry has been around for some time now, countless trading types and methods have developed over the years, and systematic trading is one of them.

If you’ve ever wondered about systematic trading and its benefits, how it works, and how a person gets into it, we answer all these questions. 

Since it is a pretty dense topic and we plan on including plenty of information to make everything crystal clear, let’s jump straight into it.

Systematic or methodical trading involves using a systematic trading platform to trade the macroeconomic market. These platforms are based on algorithmic trading programs typically used by hedge funds.

Systematic trading platforms also help traders keep track of the latest market data and enable quick and simple technical analysis. Furthermore, traders can detect market trends with these platforms, making turning profits much more straightforward.

When talking about systematic trading, it’s safe to say that it also involves designing trading strategies and even making them automatic with the use of computing models.

For example, quant investing relies on adopting strategies that analyze historical data and use it to create advanced models and calculate profitable trading probabilities and possible outcomes. As such, quant investing is also known as strategic investing.

Besides these, systematic trading also includes:

• Defining trading goals;
• Controlling rules and risk measures;
• Cleaning old and incorporating new data.

Systematic trading is known for its abundance of beneficial features. However, some key benefits are why systematic traders chose this trading type specifically. Let’s check them out.

Keeping emotions in check

Regardless of how experienced and professional manual traders are, human emotions often lead their decisions without the traders even being aware of that. Trading is known as a highly volatile and unpredictable industry.

Therefore, if unexpected volatility occurs in the market, many manual traders become irrationally fearful for their funds and missed opportunities. As a result, they make trades that aren’t so profitable or rational simply because they let fear and other emotions dictate their actions.

However, it’s easy to prevent that from happening with a systematic trading strategy. Systematic trading strategies are primarily automated, so the decision-making process is rational and not led by emotions.

Seizing profitable opportunities

By having a systematic trading platform, traders can forget about missing profitable opportunities simply because they are dealing with other things. Trading is part of a highly volatile market, and changes can happen in short time intervals.

Taking advantage of profitable opportunities is impossible if a trader isn’t present to track these changes in real-time. However, that’s not the case with a platform for systematic trading.

The system can automatically buy or sell orders via the trading platform. You have to set the buy and sell limits, and the system will perform the activities if the prices rise or drop to the desired amount.

Backtesting trading strategies

Systematic trading offers numerous benefits, but one of the main advantages is the possibility to backtest trading strategies based on historical data.

What does that exactly mean? A system allows you to see how a trading strategy would’ve performed in a specific past period. Traders can use backtesting to understand the current situation better and even learn how their trading strategy would perform in the live market.

Although the results aren’t guaranteed, it makes the decision-making more effortless and informed.

Systematic traders can implement all kinds of strategies. Overcoming the challenges of exceptional market volatility isn’t an easy task, so these traders came up with various trading strategy types to rely on in difficult times.

Their primary purpose is to protect the funds and safeguard the investors from the damages of market volatility. The most common trading strategy types for systematic traders include:

• Pair trading;
• Momentum trading;
• Cash future arbitrage trading;
• Hidden Markov model trading;
• News-based automated trading.

Pair trading

The long and short positions of the two stocks are the main focus of pair trading.

Systematic trading algorithms put two stocks together and look for a correlation between them. If underperforming stocks gain value, taking a long position on them is beneficial. Similarly, if outperforming stocks’ prices drop, going short is the right move.

It’s easy to automate the entire process with a systematic trading platform by your side.

Momentum trading

Momentum trading is based on following market trends to define momentums. Traders use these momentums to sell or buy stocks when they are most profitable.

With systematic trading, algorithms can determine the best time to invest in an asset if it’s losing value and the best time to sell it if it has reached its peak.

Cash future arbitrage trading

Cash future arbitrage trading focuses on the difference between a stock’s current cash price and its future price point. The purpose of systematic trading is to help automated algorithms predict the best times for purchasing and selling stocks – not only in the present but in the future, too.

Hidden Markov model trading

The Regime machine model, also known as the Hidden Markov model, is a strategy type that forecasts stock prices without taking any historical data into account. Since it’s entirely based on current market trends, traders can predict future stock value movements.

News-based automated trading

Finally, news-based automated trading is a strategy type that uses news’s sentiment, relevance, novelty, and market impact capability to estimate and predict future price movements of stocks, options, futures, and currencies.

More and more beginner and experienced manual traders are interested in doing the necessary work to become systematic traders. Since these traders work with some of the most innovative and advanced tools, it’s safe to say this profession will flourish in the future.

Here are some qualifications and skill requirements for launching a career in systematic trading:

• Qualifications: In most cases, the systematic trading industry requires its traders to have a bachelor’s degree in science, engineering, mathematics, or technology.

• Skills: When it comes to skills, systematic traders must possess perception for quantitative research, leadership traits, interest in trading, strategic decision-making processes, problem-solving attitude, and ability to work with a changing and uncertain market.

If you’re not sure how to obtain these skills or qualifications, you’re not alone. Plenty of people are figuring out how to become systematic traders and are interested in learning about the different paths they can take.

Although you can take the traditional route of going to the university and getting a degree that can help you launch your career in trading, formal education is certainly not the only possible way of succeeding as a systematic trader. Namely, there are other ways of achieving this, with the help of books, training, alternative trading knowledge, or workflow comprehension.

• Books: Many people believe the practical side of trading has nothing to do with the theoretical side. However, books can be your best guide to understanding all the complex concepts of systematic trading.

Today, you can choose from a wide selection of printed and digital book editions that’ll simplify your journey toward becoming a systematic trader.

• Training: Of course, nothing beats some hands-on experience that will allow you to put your obtained knowledge to the test. Numerous organizations and companies offer training and internship programs for all interested in becoming systematic traders.

Training gives you an ideal opportunity to work with excellent software solutions that will provide you with more information about the ethics and work processes present in the trading industry.

• Trading knowledge: The backbone of your trading career is extensive trading knowledge. If you’re unsure what systematic trading knowledge entails, it’s knowledge relating to the trading instrument types, strategy types, arbitrage opportunities, pricing models, and risk management.

• Workflow comprehension: Systematic trading also involves practical workflow. Understanding what’s expected from you as a systematic trader means having workflow comprehension. Some essential tasks include formulating trading strategies, coding them, backtesting them, and finally, running them in a live market.

Becoming a systematic trader includes numerous other tasks and requirements not mentioned here. It’s a demanding profession requiring its participants to undergo extensive education and training programs. Nevertheless, if you’re passionate about trading, the results are more than worth it.

Systematic trading is a part of the trading industry many people are curious about and want to leverage. As it combines the aspects of traditional trading and computer science, becoming part of this community is anything but easy.

However, it’s safe to say systematic trading is the future of trading. With the help of advanced tools and solutions, traders can eliminate human error from the plan and create calculated and well-informed trading strategies time and time again.

Are you eager to start your transition to systematic training as soon as possible and become one of the top traders?

This comprehensive guide is your best starting point, as it gives you the essential knowledge to begin your journey. To discover more opportunities for turning a profit, take the time to delve deeper into the matter and learn everything about systematic trading.