The goal of building long-term wealth through investing can be best achieved by consistently employing a disciplined investment process having a demonstrable statistical “edge” at a level of risk that ensures capital is never eroded to such an extent that the investor loses faith in the process.

Cani believes that a well designed trading system which has been developed to suit the investor’s risk tolerance is a necessary component of a successful investment process. A trading system represents a set of rules for making entry, exit and position sizing decisions. These rules may be mechanical and objective or they may be discretionary and subjective. We prefer the former over the later because:

1. The system can be back tested on historical market data not used in development. If the system has been well designed, sufficient testing should reveal a worthwhile mathematical expectation of profit.
   
   
2. The worst-case potential of capital erosion (drawdown) can be estimated in advance, allowing the investor to assess if such a system can meet his objectives or if modifications are required.
   
   
3. Judgment errors are minimized and can only arise when the investor fails to follow the system – an unlikely event if the system has been developed with the investor’s psychology in mind.

We have incorporated a number of beliefs in our trading and risk-management system. These are summarized below:

• A trading system must have a worthwhile mathematical expectation of profit if it is to be successful.
  
  
• Proper position sizing is essential to achieving success. If you risk too little, you will not meet your longer-term performance objectives. On the other hand, risking too much may result in your being “terminated from the game” during those inevitable periods when you suffer an extended drawdown in performance. There has been as much time in system development should as on position sizing within the algorithms.
  
  
• Most investors place entirely too much emphasis on being right. It’s not whether you’re right or wrong that is important, but how much money you make when you’re right versus how much you lose when you’re wrong.
  
  
• You must be willing to lose in order to win. A trading system can be profitable even if it generates winning trades less than 50% of the time. In fact, many profitable trading systems generate winning trades only 30-40% of the time.
  
  
• Successful investing is 40% risk control and 60% self control. As such, the investor’s psychological profile may be the most important factor in contributing to investment results. Therefore, it is reasonable to conclude that an automatic trading philosophy becomes a paramount element in the trading system to reduce subjectivity and increase objectivity in the ever changing market conditions.
  
  
• Risk orientation and conservatism are often considered opposing personality traits. Both are essential to achieve good performance. Our objective is to take the risk-oriented part of our personality and put it where it belongs: taking the trading signals. The conservative part of our personality also must be put where it belongs: proper position sizing.
  
  
• Through diversification, we can smooth the equity curve and increase opportunity. Diversification can be achieved in two ways: (1) using multiple trading systems on the same market, each designed to capture a different market characteristic and/or different time frames; and (2) trading multiple markets with the same system.
  
  
• The easier a system is to trade, the less robust that system is likely to be over the long term, However, a well designed system that is compatible with the investor’s psychology and trading beliefs, and which has been thoroughly tested and is well understood, will likely be more easily implemented than one which has not met this criteria.

A successful investment process consists of more than just a good trading system. We believe that a healthy attitude resulting from a through understanding of the investor’s psychology is crucial both in the development of the trading system and its ongoing implementation. The weak link in the process requires a well thought out investment plan covering all aspects of the process from the minimum capital required to make the process work through to a disaster recovery plan.