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A lot of the best traders (at least the ones I know) use some kind of mechanical rules in their trading. “Mechanical” implies that the rules are based on some kind of objective rules, usually quantified data. The trader should follow these rules exactly without hesitation or emotion. In this respect mechanical trading is the complete opposite of discretionary trading.
When trading there are a lot of decisions to make: when to buy, when to sell, when to take profit, when to take a loss, etc. If using your own judgment this might be tiresome and sometimes very difficult to execute. And for most traders highly unlikely to bring any success. Why? With so much decision making it requires a great intellect to beat the market. You have to fight the market, but also fight yourself. It’s so easy to do the wrong thing if you don’t have objective rules. These rules need to be backtested, of course.
As with any endeavor, there are pros and cons with mechanical rules. Basically there are four huge advantages compared to discretionary trading:
The drawbacks is that you have to quantify data to make rules. Obviously that takes time. Second, the system has to be adjusted from time to time, so-called post analysis. And last but not least, it only works if you want to spend a lot of time making a system. But overall, anyone who is good with numbers can make some good strategies with some experience.
A complete mechanical trading system involves the following: what markets to trade, when to buy (or go short), how to big position, when to exit a position and perhaps implement a stop loss. Before you design a system you need to set your objectives, which markets you are going to trade and your timeframe.
When you have designed a mechanical system, it does not require much time to trade it. However, to make one requires a lot of time. But for most traders this is probably the best route to go to become consistent in trading.
— Oddmund Grotte of Quantified Strategies
Contributing authors are active participants in the financial markets and fully engrossed in technical or quantitative analysis. They desire to share their stories, insights and discovers on System Trader Success and hope to make you a better system trader. Contact us if you would like to be a contributing author and share your message with the world.
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