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.
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