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Mechanical Trading systems -
Spotting the Ones That Make Money!
Mechanical trading systems are, as you would expect, systems that
make trading decisions for you.
The thought of having mechanical
trading systems you can simply use to generate automatic profits, is obviously
very attractive to many traders.
Most traders however, end up
disappointed with mechanical trading systems, as they never seem to live up to
the sales hype, and the performance figures used to sell the system never seem
to be repeated in real life.
Why do most mechanical Trading Systems
fail to live up to the Hype?
There are two main reasons for this:
Black Box Systems
These are systems where the vendor does
not reveal the logic of the system. Of course, for a trading system to be
successful it needs following rigidly with discipline.
If however, you
don't know the logic of a mechanical trading system, you will probably not have
the discipline to follow it when a losing period occurs. If you don't have the
confidence to follow a mechanical trading system, you don't have a system at
all!
Curve Fitting and Optimization
Another problem is curve
fitting or optimization of mechanical trading systems. These systems yield
extraordinary performance in back testing because of the tweaking of the system
rules to make them fit the data. A trader once likened this to shooting holes
in a barn door, and then drawing circles around every hole to make each shot a
bull's eye!
Of course, anyone can make a mechanical system make money
if it is already know what happened in the past.
You will never see a
hypothetical performance that fails! Most vendors achieve this by making the
system fit the data, which of course will lead to disappointment in the brutal
world of trading.
The fact is that most mechanical trading systems don't
deliver the results they promise and traders end up disappointed. This is not
to say that there are not good mechanical trading systems to buy, but you need
to do your research first, and the following checklist will give you the
salient points to look for.
Mechanical systems - What Makes a Good
System?
The rules and logic are fully explained, so you have confidence
in the system when it suffers a string of consecutive losses:
Some
evidence of a real time track record i.e. the system has made money in the real
world of trading and not just hypothetically.
Look for simple systems,
as these tend to work best and will tend to be more robust in the real world of
trading.
Avoid any optimised system. Clues to an optimized trading
system are ones that use unique rules or different parameters to trade specific
financial markets. If the system has sound principles, then it should work on a
broad spectrum of financial instruments.
Make sure that the drawdown
figures are compatible with the equity you have to trade.
Not all
mechanical trading systems are doomed to failure, but if you want to get one
that works, be realistic and do your homework first.
Building Your Own
System Most traders like the concept of a mechanical trading system, but like
to have some input to customize the system to their specific personality.
If you have some human input, it is easier to implement the trading
system with rigid discipline, which is the key to building consistent
profits.
Learn More about a Legendary Trader
Why not attend
one of our FREE Seminars held in London and cheshire.
click here to book on-line or telephone 0161
285 4488.
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