What are Mechanical trading systems

Many traders make very good livings trading just discretionary systems as we discussed in the previous Blogg. So there is no need to ever move past trading discretionary trading methods. However……….

It is always going to be difficult to prove  or precisely quantify the extent of the “edge” that any individual will get from a particular discretionary method.

This is because by definition results will vary depending on each individual’s interpretation of the method. Each trader will get different results depending on how skilled and experienced they are and precisely how they  interpret the rules.  Some traders may do very well with a method that they have truly mastered whilst other traders may do less well with the same method because they have not fully got to grips with it or lack the experience.

Mechanical systems get over this problem by using  very precise tightly specified  rules for selecting the entry and exit points which leaves no need for any additional  interpretation or judgement by the  trader himself.

A simple mechanical system might therefore say if it is Monday at 2pm and RSI is greater than  70  then buy the market and if it is Tuesday at 3pm exit the market.

This means that all  traders trading that system will  get  identical entry and exit points.  The trading process has, if you like, been  de-skilled and mechanised – which has many advantages.

With mechanical trading  once the market complies with all of the rules then the trader will manually enter his orders on the trading platform in exactly  the same way as the discretionary trader would.

Because the rules and  parameters are so precisely specified it means that such systems can now be tested and back tested over long sequences of historical market data  to show how they would have performed in the past. Such systems can now be properly referred to as  to as evidence based mechanical trading systems  because they can be proved to have worked over past data and the edge can now be precisely quantified in mathematical terms.

A second major advantage of such systems is that because they remove the “individual judgement” element from trading decisions they effectively “de-skill” the trading process to the extent that anybody that has access to the rules will get the same results whether they are a highly skilled and experienced veteran trader or a newbie with just a few months experience.

The  Pro-trader beginners/intermediates course includes a mix of discretionary and mechanical systems to offer you the widest possible choice of trading approaches.