Many traders have come across advertisements for trading systems that promise to generate profitable buy or sell signals for triple-digit annual returns. Of course, savvy traders know that these trading systems wouldn’t be sold for a few hundred dollars if they were capable of consistently generating such high returns.
Trading systems seem to work
On the other hand, there’s no doubt that some trading systems are tremendously successful. The American hedge fund Renaissance Technologies LLC famously generated a 71.8 percent annual return between 1994 and mid-2014 using quantitative trading systems. And, there’s no doubt that they aren’t the only firm using such technologies.
The goal of this tutorial is to introduce you to trading systems, explore how they are built, and ultimately provide you with the knowledge you need to start experimenting on your own.
In the next section, we will define what trading systems are, outline their components, and discuss their advantages and disadvantages.