PART ONE
How to Evaluate a System
At the time of this writing, there’s a TV commercial running on several of the
business and news channels. The commercial is for an online direct-access bro-
kerage company that claims to give you better fills than the brokerage company
your cubicle-sharing colleague is using. The plot is as follows: Guy 1 proudly tells
Guy 2 that he just bought 300 shares of XYZ for $25.10, only to hear that Guy 2
just bought 200 shares of the very same stock for $25.05. Of course, this 5-cent
difference makes Guy 1 all upset, and Guy 2 takes advantage of it by smugly alert-
ing everyone to “Tom’s unfortunate stock purchase” over the company intercom
system.
Obviously, the purpose of the commercial is to make us believe that the most
important thing in trading isn’t a long-term plan, involving such “mundane” fac-
tors as the underlying logic of your system and numbers of shares to trade, but only
to get a 5-cent better fill than your cubicle buddy.
This is a good example of how many companies within the investment and
trading industry don’t know what they’re talking about. Or if they do, they want to
fool you into focusing on the wrong things, because if you were focusing on the
right things, their services would be obsolete. I really don’t know which is worse.
Basically, two types of companies try to feed on your trading. The brokerage
companies try to make you believe that a 5-cent better fill makes all the difference
in the world. The newsletter and market-guru companies claim that only their top-
and-bottom-picking system will help you squeeze those extra 10 cents out of each
trade, which will take your account equity to astronomical heights (or at least,
finally make you profitable).
The truth is those few extra cents matter little in the end. To understand this,
let’s return to the guys in the cubicle and assume that XYZ indeed started to moveCopyright 2003 by The McGraw-Hill Companies, Inc. Click Here for Terms of Use.