Be there an organism that symbolizes a good speculator, it has to be the spider. Are you familiar with its method of foraging? Instead of moving around to hunt, it simply builds up a web to let its prey automatically fall into it. It is the same in trading, for whereas the amateur assumes a trade with uncertainty, the professional sets up a trading system and let the trades stumble across him.

Systematic Trading

The best traders do not forecast the market, instead they react to the market in a disciplined manner by following a trading system – a set of rules that governs the decisions of buying and selling– and a winning trading system is often developed from the hard work of past data research. As stock expert William O’Neil said, “The first step in learning to pick stock market winners is for you to examine leading winners of the past to learn all the characteristics of the most successful stocks. You will learn from this observation what type of price patterns these Stocks developed just before their spectacular price advances.”

He also said, “Many long evenings of study at last led to rules, disciplines, and a plan that finally worked. Luck had nothing to do with it; it was persistence and hard work. You cannot expect to watch television or drink beer every evening and find the answers to something as complex as the stock market or the American economy.”

This begs the question of why bothering to spend some much time to develop a system instead of just trading in a discretionary way, and the answer is there are two major advantages in system trading, as explained below.

Benefit 1: It speeds up the process.

Firstly, just as the web saves the spider from the hassle of running around hunting, a trading system saves the trader from unnecessary effort.

To master the art of stock trading, you must spend time to study the selection of stocks as well as to decide the timing of entries, and if you do not do it with a system, you will be overwhelmed by your task given the number of stocks available to trade. Moreover, as William O’Neil points out, in every ten stocks you picked, there are properly just one or two winners, so imagine what kind of effort it is if you have to go through all that without a system.

System trading allows you to process information quicker, because it is easier to follow one set of criteria all the time, than to stop and think a hundred times for a hundred stocks each time. Therefore, the best traders systematize their method so well that they can immediately teach it to a beginner and let him use it. One example is the famous CANSLIM trading system invented by Williams O’Neil, a system which has made a lot of O’Neil’s students to get rich, including Dan Zanger, who made the Guinness record for making the highest percentage-wise stocks return of all time.

Benefit 2: It enforces discipline.

Secondly, just as the spider that waits by the net until it catches a prey, and so is a good trader who keeps following the system even after an inevitable losing period. As Trader John W. Henry puts it, “By quantifying the circumstances under which key investment decisions are made, the JWH methodology offers investors a consistent approach to markets, unswayed by judgmental bias.”

To put it another way, a system to a trader is like the law to a country, that once it is enacted, everyone should follow it, and the ruler cannot change it everyday based on his own “discretion”, for otherwise the country would be in chaos. Of course, the initial designing of the system (e.g. portfolio, risk percentage) is discretionary, just as it is up to the spider to decide where to set up the web. However, after you have decided on the basics, you must systematize these decisions and, from that point forward, follow them mechanically.

It goes without saying that discipline is very important in trading. By having a set of rules to follow, one has something to cling on when they start to lose control. Decisions made at “discretion” are subject to bias and second-guessing. For example, the most common mistake in “discretion” is not to cut a loss when one should. Have you ever had the experience of ignoring small losses that later grow into larger ones? As Williams O’Neil said:

“If you aspire to be a successful investor, you must face facts—most of the reactions you have about taking losses are rationalizations, because no one wants to take losses. You have to do many things you don't want to do to increase your chances of success in the stock market. You must develop exact rules and tough-minded selling disciplines.”

Another point for having a system is to avoid impulse trading, which is defined as entering the position when one should not. The successful traders do not force the market and trade everyday, and instead they wait patiently for the right market conditions as indicated by their systems. As O’Neil said, “Remember, there are no good stocks—they are all bad… unless they go up.” This enables them to keep the power dry until the best opportunities come, and avoid getting emotionally obsessed with trying to do something when they should not.


To put it in a philosophical way, just as a spider abides in “non-action” and let the web catches the prey, so should a trader resort to “non-thinking” and let his system make the trades for him. The worth of following a trading system is that it sets up a “standard operating procedure” for a trader, so that he can make his decisions efficiently and systematically without any human bias. It is then very clear that, for those who want to play this game successfully, the first thing to procure is a good trading system, and the discipline to follow it well. It surely might take away all the excitement of financial speculation, but this is a serious business, not casual gambling, and those who do not heed this will be on a certain path of losing money.

Author's Bio: 

Victor Chan Wai-To is an active trader in Hong Kong.