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Stable systems

The main way to make a system stable is to create rules that allow systems adopting for different market conditions and supporting systems in a simple view, being less dependent from changes in the markets.

Source: Regulation

You can build even more stable systems capable to adapt for changing market conditions the same way as nature creates complicated organisms able to survive in changing conditions thanks to a great adaptability. Human is an example of such a system. Humans are able to survive in Sahara sands and in Arctic ices because the power of the intellect allows them to adopt for those different environments.

Any given system works better in certain conditions. For example, systems designed to follow a trend work better in a market with a quietly developing trend, while systems playing against the trend work better in a market with high volatility level and the absence of a trend. Portfolio filter is a rule which can make the system more stable whereas it helps to exclude markets that are currently in unsuitable conditions for using this particular system. Such a filter, for instance, is included in Donchian’s trend system. It does not allow deal opening when the market breaks through against the current trend, as that happens only when the market is in an unfavourable condition. Breakthrough in the direction of the current trend occurs much more often. Adding such a filter will make the system more sustainable.

Systems with simple rules are more stable in the same way, as they usually work in a larger number of different situations. Complicated systems are difficult to trade because they’ve been designed for certain features of the market’s behaviour to be used. Once those features have been noticed, special rules could be created. The more rules are added, the stronger the system connects to a certain market’s behaviour and condition. And that increases the probability of a situation when the price action would be changed in the market or those rules will stop working.

Simple rules are based on more applicable concepts which withstand real trading conditions better than complicated rules related to a certain market’s behaviour. Make your systems simple and you will see that they stand the test of time much better.

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