The 3 main categories of trading systems
So, there are three different ways to approach the market:
One is trend following—which, rather plainly, just means “follow the trend.” These are strategies that don’t try to predict; as the name implies, they simply follow. They spot a market trend, identify a movement, and choose to go along with it—if it shows promise. And “shows promise” means it breaks through certain levels, signaling strength.
Another approach is counter-trend. That’s when you believe the current trend is about to end, so you take the opposite position. The market’s going down, and you believe it can’t go much lower, so you enter. Or maybe it dropped, bounced a bit, and you get in expecting a bigger rebound.
Finally, there’s the third major group of trading systems, Bias strategies, based on seasonality. These take advantage of recurring patterns. Patterns that repeat over time, often tied to mid-term seasonality. Think grains, soybeans, agriculture. But also stocks. For example, during the night session, stock indices often tend to rise. Once identified, these patterns can be exploited.
How to test and improve a trading system
So what does the Unger Method do? The Unger Method helps you decide which family of strategies to use. Should I go with trend following? Counter-trend? Or take advantage of the market’s micro or macro seasonal patterns?
It also gives you the tools to figure out which direction to go. And trust me—it gives you the tools. It’ll suggest: “Hey, on this market, better stick with trend following.”
You’ll start with a trading system framework, a basic skeleton with core rules. Then, by adjusting the inputs, you can shape it into something that fits your market of interest.
You’ll end up with a strategy built around your personal risk profile. And that’s super important, because I can’t decide what you can handle. Everyone must take ownership of their own risk and especially their money.
So what do you do next? You take that rough strategy, throw it on the market, and see what happens. You check if, even in its rough state, it would’ve made money in the past. Or at least shown some potential.
Almost never will it be ready to use right away. If only it were that easy! But if it looks promising? That’s when you step in and start refining it by adding some basic conditions.
Let me give you a silly example, but it’ll help you understand the process. So, I say: “I need to go to court.” Okay, maybe not the best example… but let’s go with it. I need to go to the courthouse, which is three kilometers away.
Then I ask: “Will I get to court on time if I leave at 8?” Yes, I probably will… That’s the raw trading system. I’ll make it in time. Then I start adding conditions. If it’s Tuesday, I’ll take bus number 9, because bus 9 gets me there better. But if there’s a transit strike that day, I’ll go by bike. And if I use the bike, I have to lock it. I take all these conditions into account.
What’s the best way to get to court on time? Bus number 9 and a walk down Camellia Street. But if it’s raining, I’d better avoid Camellia Street—it gets all muddy. So instead, I’ll take Goldenrod Lane.
The importance of common sense when setting conditions
These are all rules based on what? Common sense. Don’t walk through the mud when it’s raining. Choose the better route.
When you put these conditions together, you’ve got a pre-set plan. If it’s raining, you’ll know as soon as you get off the bus. So you can decide whether to take Camellia Street or Goldenrod Lane. You make your choice based on conditions you’ve already tested. You’ve been down Camellia Street before and got soaked—so now you know, maybe it’s better to take the other way.
All these things together give you your plan. Based on what’s going on, if it’s sunny, maybe I leave five minutes earlier and just walk. Great weather? That’s part of the plan too.
Same thing here. The trading system looks promising? Great, now I add conditions. What if the market went down yesterday? It would’ve worked better. So I add that as a condition: do this only if the market went down yesterday.
What if the market’s been stuck in a tight range all week? Oh, it’s improved! So I add another condition.
What overfitting is and why it’s dangerous
But be careful: every condition you add has to be rooted in common sense. You can’t just let the computer choose all the conditions, because then you risk falling into another bad trap: overfitting.
Overfitting is when you build something that’s too tailored to the past and it’ll never work in the future. Because it takes everything that’s happened, mixes it all together, shows you something that looks good, but doesn’t reflect the true nature of how things actually play out.
So, be careful. If your conditions are grounded in common sense, if they come from a thoughtful decision, then there’s a much better chance they’ll still work tomorrow.
So here’s the process: you start with a rough idea. You set your stop loss, take profit, and other necessary elements.
Then, you add conditions based on common sense, some of them are even pre-coded, and you choose them with your brain, not just the software. They’re based on the market situation. Like I said before: congestion, or a drop in price the day before.
All those types of conditions come together to form your final trading system. And if it looks convincing, you put it in the market, ideally after a period of monitoring to make sure it really does what it’s supposed to do.
You build it, then put it in the drawer for a bit. See if, over three or four months, it keeps doing what you expected. And then you can use it in live markets and go.
Diversification: why you need a portfolio of trading systems
Just one strategy? No. If you enjoy this, it’s great, because you’re going to need many trading systems. You need a lot of them. Because one of the most important things in the markets is diversification.
Diversification means you can operate on many different markets at once and spread your risk. You’re not putting all your eggs in one basket. You can trade commodities, for example crude oil or wheat, like I mentioned earlier. You can trade stock indices–the classics. You can trade currencies.
So when you bring all that together, and each one is tackled with a strategy you’ve selected, you build that final infrastructure, that basket, that portfolio of strategies that gives you diversification.
It puts you, hopefully, in the right place at the right time when it matters most. That’s the goal for all of us.
Your strategies—20, 30, 40, however many—won’t all be making money all the time. But if you’re well diversified, the ones that are doing well in that period will usually outweigh the ones that are losing.
And so, overall, your portfolio should hopefully keep moving in the right direction.
Key risks to avoid: mid-run interventions and overexposure
Alright, so just to recap. I started by talking about risks, and I want to end with risks.
Everything might seem pretty simple in the end, because, like I said earlier, it’s all linear. But mistakes do happen. And there are potential pitfalls.
The first risk is interfering once the system is live. You’ve done all the planning, everything’s set up perfectly, bur then, the moment it goes live, if things don’t go exactly as expected, you start meddling. That kind of meddling? I do it too sometimes. It happens. But it’s a mistake, because it means you’re not sticking to the plan.
Another risk comes from overconfidence: overexposure. Taking positions that are too large for what your account can really handle. And that only increases and amplifies your risks. Sure, you could make more… but you could also lose more. And that’s a mistake, because in trading, you need to tread very carefully.
During development, as I mentioned before, the big risk is overfitting, adding too many rules just to make things look better. But these are rules that go beyond common sense. They end up being just a messy pile of conditions with no real logic behind them.
That’ll give you a strategy that looks great on paper, based on past data, but that likely won’t work going forward.
These are, more or less, the real risks you might face. And the ones you absolutely want to avoid.
It takes experience, because the temptation to make things look better than they really are is something we all deal with.
All right, so here we are, at the end of this mini-course! See you soon and happy trading, everyone!
