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Build your own trading system

Cover of  by Anthony Garner

Build your own trading system

This month?s theme of taking matters into your own hands provides the perfect opportunity to review a recent book from Anthony Garner on the subject.

A Practical Guide to ETF Trading Systems investigates how you can use low cost ETFs to create powerful trading strategies that not only beat the market, but reduce your risk as well.
Like many of the methods outlined this month, the book would ideally suit someone who doesn?t have the time for short-term day trading or is looking at ways to increase the returns from their medium to long-term investments. The book provides a number of successful, easy- to-follow trading systems, but the emphasis is more on providing you with ideas to stimulate your own research rather than just showing you a bunch of profitable systems. This is the intention at least, but in explaining the logic behind the strategies so well, it does make it easier to understand the systems and for you to just apply those presented yourself if you wanted to.

The book is split into two parts. The first outlines trading systems in general including tips on where to get the right data, what software to use and practical tips for creating your own system. In this section, Anthony builds a strong case for the potential with technical trading systems that ignore market fundamentals. He refers to a number of rule-based systems and funds with public track records as well as academic studies that support the idea that stock market averages can be beaten (at least from the perspective of reducing risk). While there are an equal number of studies that hold the opposite view, the evidence at least adds weight and credibility to the strategies he outlines later. Perhaps the most interesting part of the first section is where Anthony examines various benchmarks and how an investor can improve returns and reduce risk by focusing on different markets.To gain a global perspective, he looks at buying and holding the MSCI World Index which is made up of various stock markets throughout the world. Anthony then performs various comparisons, including the performance of a portfolio that invested 60% in the stock market, 20% in bonds and 20% in commodities.

Performance MSCI WorldStocks/ bonds/commodities
CAGR 6.8% 10.07%
Max total equity drawdown 54% 40.8%
Length of drawdown 80 months 44.6 months

Not only does a mixed portfolio outperform the World Index, it also reduces risk with the length of drawdown being half that of the overall market. Food for thought!

Simple trading systems

In the second section, Anthony outlines two very simple trading systems and compares their performance to different benchmarks such as trading them using the Dow Jones or trading them using the stocks/ bonds/ commodities portfolio. The strategies are simple and could be performed by anyone at home with a computer. Do they work?

Here?s an example from the Bollinger band system:

Performance Stock market onlyStocks/ bonds/commodities
CAGR 14.12%11.26%
Max total equity drawdown 24% 14.5%
Length of drawdown 44.2 months 42.2 months

Here you can see that the Bollinger band increases returns compared to simple buy and hold, but not only that, it dramatically reduces risk for both a stock market and a balanced portfolio.
This system is long-only as Anthony demonstrates that markets have a natural inclination to push higher so going short isn?t profitable in the long run. The Bollinger system trades 30 times a year on average, or 90 times a year for the balanced portfolio because you have to close or open each of the stock/ bond/ commodity components. This might satisfy those of you who like more action.

The bottom line

On the back cover we?re told that the book reflects Anthony?s belief that successful investing is not complex, that market timing works and that investors should spurn traditional actively-managed products in favour of managing their own investments using index trading funds.

As I?m of the same opinion, I enjoyed reading Anthony?s book. It is well written, following a logical progression from background explanations to full-blown trading systems. There is some technical performance jargon used throughout, but all these concepts and terms are well explained in the first section.
Although Anthony?s aim of teaching traders to teach themselves is certainly admirable, perhaps it may have been better to be realistic and accept that most people want off-the-shelf things they can follow and may not have the time or inclination to follow up with their own research. Therefore, it may have been better to leave the system creation angle for a follow-up book and focus entirely on the strategies unearthed through the author?s research.

Another slight criticism is that although Anthony is English, the book uses mostly examples from US markets (though the MSCI World can be invested from anywhere). Thankfully the concepts are very easily transferable even though we don?t quite have the choice of ETFs that our American cousins enjoy.

Value For Money: 4/5 ? A lot of value packed into this reasonably-priced book.
Profit Potential: 4/5 ? Excellent profit potential with evidence to back it up.
Ease Of Use: 4/5 ? Perhaps not for the complete beginner, but it is very well explained.
Longevity: 4/5 ? The strategies are simple and logical and appear to show no signs of being over optimised. I imagine the book will be a good reference for some time.
WRP overall rating: 4/5 ? Excellent book that would suit anyone looking for ideas to increase their stock market returns and reduce risk.

A Practical Guide to ETF Trading Systems
Website: (Publisher)
Cost: Around £25 including postage (currently £21.63 on Amazon)
Level: Beginner upwards
Location: Global
Category: Investor education

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