When it comes to trading systems, there are three distinct camps. One subscribes to the belief that the more investors who follow a system, the more likely it is to be successful. Another faction is convinced that the only route to investment riches is to keep a trading strategy a well-protected secret. Still another group of investors begins trading without any system at all.

What’s common to all of these investors is that many of them will encounter failure. When they do, they are faced with a decision: to continue searching for the right trading system, or to abandon the effort entirely. It’s no small decision — choosing the right path can quite literally make or break your fortune. Read on to learn how to assess a system and determine its worth.

Tried and Tested Trading Systems

Many systems can only be profitable under the market conditions for which they were designed; in fact, most are designed to be used in either a ranging market or a trending market. In light of this, some active traders use two different systems, depending on the prevailing market.

System Vs. Method

A prevalent view is that the vast majority of traders cannot or choose not to follow a system properly. Therefore, this view suggests that it really doesn’t matter how many traders know about a particular system or attempt to follow it. Famously successful trader Richard Dennis, in his turtle experiment, took a group of people (turtles) who had never traded before and taught them his system. The results were compelling: although the turtles became skilled traders and made many millions, the success of the group varied dramatically. Eventually, the system was made public, free of charge, with the reasoning that even with what turned out to be rather simple system rules, most traders who tried could not or would not adhere to the system. This experiment illustrates that faithful implementation of a system may be more important than system selection; therefore, investors must be realistic and choose one they are willing to rigidly follow. (For related reading, see Master Your Trading Mindtraps .)

The Lemming Effect

An equally somber analysis that draws a different conclusion suggests that an investor should not follow any system that is publicly available specifically because other traders fail to follow the same system correctly. The reasoning behind this notion is that the lack of complete adherence to the rules and the novice nature of public system traders causes them to make bad trading decisions — such as entering a trade too late and exiting too early. This, they believe, reduces the profit potential for those who do trade exactly as the system demands, as the early exiting causes the price to stall or even reverse direction.

There is a persistent belief that the more widely publicized and used a system is, the less likely it is to be profitable. It is fair to say that this effect is unlikely unless the system is highly popular or there is very little liquidity in the market. Logic also dictates that if this lemming effect did happen, the more followers the system had the greater the effect would be. Therefore, an investor looking to follow a system should paper trade the system in a demo account for some time, exactly according to the trade rules, keeping an eye out for signs of early exiting. The best indicator of this is to test trades that consistently collapse before reaching their potential. It would be unwise to attempt to time the exit from these trades before the collapse because, traditionally, collapses come sooner and sooner until the trade has insufficient profit to justify making it at all. This is because the other proponents all try to beat the collapse themselves. Just as with the manufacturing of physical products, competition drives down profit margins to the lowest acceptable point. (For related reading, see How Investors Often Cause The Market’s Problems .)