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What are Trading Systems and Systematic Trading?

Updated: May 9


Hello and welcome to our first article. The first few articles will be an introduction to set out some of the terms we will use in future articles. After these we hope to engage with our readers more. All articles are saved at our Medium page.

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These articles are based on my experience from consulting and product development at The IQT. Do let us know if there are topics you would like us to cover, questions you would like to resolve, or if there are insights you would like to share from your own experience.


This time we will briefly define what we mean by the terms:

  1. trading system

  2. systematic trading

They are related yet slightly different.

The definitions which will be given are based partly on my consulting experience and partly on what I have encountered in events and interactions with traders in the London Systematic Traders meetup group. I joined this meetup in 2014 and became the lead organiser in 2019. The founders of the meetup may be cajoled for their insights in future newsletters.

Main Points

1.A trading system is a set of one or more trading strategies along with associated risk management.

The trading process in general looks like [we will explain this more in Article 4 — “A Detailed Look at The Trading Process”]:

A trading strategy is a specific implementation of this process, e.g. use a particular type of analysis to identify a particular type of setup and then enter, manage and exit in a particular way.

Established traders and hedge funds typically trade more than 1 strategy, in a portfolio. The calculations used to determine the makeup of the portfolio (i.e. how much capital to allocate to each strategy) constitute portfolio management A related term is risk management, which manages the potential downsides of a strategy or portfolio.

Overall, a trading system is a set of strategies (one or more) coupled with risk management. Our newsletter will look into various aspects of different trading systems in future issues.

2. Systematic trading is rules-based trading i.e. non-discretionary trading. It is not necessarily the same as automated or algorithmic trading.

Discretionary trading is trading where decisions are made at the trader’s discretion, enabling multiple, varying sources of information to be consulted along with the trader’s instincts. It is possible to have a trading system which is discretionary; then all steps in the trading process for each strategy, as well as risk management decisions, are discretionary.

Some traders feel discretionary trading can be inconsistent and too prone to emotional mistakes which can cascade (that way lies Nick Leeson :)). They prefer a more rules-based approach which they call systematic trading: only trading according to their own pre-defined rules, which they may have written down in a trading plan. I believe this to be the spirit of the London Systematic Traders meetup group, to seek to discuss strategies and approaches which lead to greater consistency in results.

Overall, a trading system is arguably a broader term than systematic trading, as it also allows for discretionary trading. Whereas systematic trading cannot really exist without some form of well-defined trading system.

Further Reading

In the article “The Spectrum of Automation”, we will review a range in the level of automation in trading i.e. discuss manual versus automated trading, and gains possible from automation.

Happy trading!

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