Mechanical trading systems; what’s that?

Mechanical trading is based on pre-set rules.  These rules are followed rigidly by normally placing them into a computer program thus eliminating any second guessing/subjectivity.

Mark Abraham of Quantitative Capital Management puts it this way: “It is when the unimaginable occurs that the systematic trader remains calm, presciently knowing when to buy, sell, or adjust their exposure”…

If you are feeling weak-kneed, don’t start second guessing the market. The moment you start saying ‘what if I do this instead of that’, then you are basically negating the value of any mechanical trading method. Be acutely aware of your emotions. If you are overly worried, you are holding too large a position – there is nothing wrong with the position [long if it says long, short if it says short], only your exposure…

It is better to reduce your positions, or holding, step back a little but whatever you do, don’t change course. This is money-management in a nutshell, a huge subject area in itself.¬† However, this needs to be done with utmost care as opposed to randomly reversing or closing positions prematurely.

If we feel a trade may be going wrong [this does happen!!], then we do not question the signal, only our ‘exposure’. We deal with this by reducing the number of positions, often re-loading when the markets start moving again in the desired direction…

There are distinct advantages to mechanical trading, veterans often talk about – the basis of a mechanical trading approach makes life easier, working to eliminate emotion from trading decisions and actually ‘forcing’ us to stick to the rules. Having a rules-based system to identify support, resistance and other important trigger levels then sticking to it is itself a good plan.

This is the single most important lesson learnt in trading by those who stay the course. In other words a mechanical system enforces discipline – and this is what Mark Abraham talks about. Break these rules, and you are no different to the gambler who ultimately goes broke.

So, let’s get some more input on money management, a huge area of experimentation, learning, and extensive value to members. Think ‘exposure’, comfort-zones, small-steps.