Actually, I try to keep feelings out my decision making as much as possible. Emotions can cloud judgement. That’s why I prefer a more systematic approach. That said, I don’t think anyone should simply follow any automated strategy blindly. Most strategies are designed to work best only in specific market conditions. For example, range-based systems tend to work best when the market is moving sideways, while momentum-based systems tend to work best when the market is trending.
However, it’s not always that straightforward. As you mentioned, even the pros can run into difficulties in properly assessing the situation. Just this week, I read two articles about prominent trading firms that had enjoyed success in the past but struggled recently:
[li]“FX Concepts grew to manage $14.2 billion in January 2008 by successfully using systematic investment strategies in currencies, fixed-income derivatives, and commodity and equity futures. Taylor was named one of the best-paid hedge fund managers of 2008 by Alpha magazine, pulling in an estimated $250 million. But like many trend-following hedge funds (often called managed futures shops or commodity trading advisors) FX Concepts has lost money in recent years. The flagship multistrategy fund is down 11.35 percent this year through August.”[/ul]
[li]“Profits across many of Europe’s largest high-frequency traders slumped by nearly a half last year as they struggled with an industry-wide fall in volumes and regulatory attempts to curb high-speed trading.”
I think the lesson to take from these examples is not to become complacent. The market is always changing. There is hope in that fact. It means that whoever is willing to put in the work today will be the best prepared for tomorrow. People can’t hang their hat on past successes.
Something that has helped me in selecting systems is reading news about current market conditions. For example, quantitative strategist David Rodriguez updates the table below every Monday on DailyFX.com which is a free site. (I refer to this research in the DailyFX signals thread.) It shows his preferred strategies for the coming week.
It’s not that Rodriguez changes systems every week, but he does continually assess whether the conditions that initially made him choose a particular strategy are still present. The key is assessing current market conditions and being willing to adapt accordingly.