Quality Money Management : Process Engineering and Best Practices for Systematic Trading and Investment

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2.14. Life Cycle

Trading/investment systems have life cycles in the way that any new product does.

Shorter-term, higher frequency systems tend to have shorter life cycles, whereas longer-

term, more fundamentals-driven systems tend to have longer life cycles.

● Design stage. Trading strategy design, idea inception through Stage 1, where the

product team benchmarks requirements according to the vision and scope set forth

in the Money Document.

● Testing stage. During design and development (i.e., during the product realization

process), shadow trading in Stage 2 of our methodology and probationary trading

in Stage 3 will generate measurable performance indicators that may or may not be

indicative of those encountered during maturity.

● Growth stage. During the growth stage, investable assets are gradually being allo-

cated as qualified opportunities arise, though the full sum has not yet been invested.

● Maturity stage. During the maturity stage, the available funds are fully invested

and performance should conform to test results and/or the benchmark. Maintaining

maturity requires continuous improvement to prevent decline.

● Decline stage. During the decline stage, trading/investment system performance fails

to conform to test results and/or the benchmark. Continuous improvement measures

may not be effective and the trading/investment system may be shut down.

Continuous improvement ( kaizen ) processes should extend the maturity stage of any trad-

ing/investment system that would otherwise use static algorithms and technologies.

2.15. Modeling Software

As we define it, the term modeling software will refer to whatever software is being used

to model or prototype quantitative and risk management methods. By use of the term,

we mean to include Excel, Resolver, MATLAB, Mathematica, SAS, Zack ’ s, or any other

similar software package.

2.16. Preventive Action

The ISO definition of preventive action is “ action taken to eliminate the cause of a poten-

tial nonconformity ” or special cause variation. Our definition applies this to trading/

investment system nonconformity. The key word is eliminate, as opposed to reduce or

contain a nonconformity. Many firms use a patch to quickly contain problems. A patch

does not eliminate the problem.

2.17. Process or System

The American Heritage Dictionary defines a process as “ a series of actions, changes, or

functions bringing about a result ” or “ a series of operations performed in the making or

2.17. P R O C E S S O R SYSTEM