Mechanical Trading Systems
Sunday, 14 November 2010
Mechanical trading systems are systems that generates trade signals for a trader to take. They are called mechanical because a trader will take the trade regardless of what is happening in the markets.
In theory, this should eliminate all biases and emotions in your trading, because you are supposed to follow the rules of your system NO MATTER WHAT.
If you do a simple search in Google for “forex trading systems” you will find many many people out there who claim to have the “Holy Grail” system that you can purchase for “only” a few thousand dollars.
These systems supposedly make thousands of pips a week and never lose. They will show you supposed “results” of their perfect system and it will make your eyeballs turn into dollar signs as you sit there and say to yourself, “wow I can make all this money if I just give this guy $3,000. Besides, if his system making thousands of pips a week, I’ll be able to make my money back in no time.”
There are some things you should know before you give them your credit card number and make that impulse buy.
This lesson will guide you through the steps you need to take to develop a system that is right for you. At the end of the lesson, I will give you an example of a system that I trade just so I can show you how awesome I am! (insert evil laugh here).
Goals of your trading system
I know you’re saying, “My goal of my trading system is to make a billion dollars!” While that is a wonderful goal, it’s not exactly the kind of goal that will make you a successful trader.
When developing your system, you want to achieve 2 very important goals:
The hard part about those goals is that they contradict each other.
If you have a system who's primary goals is to catch trends early, then you will probably get faked out many times. On the other hand, if you have a system that focuses on avoiding whipsaws, then you will be late on many trades and will also probably miss out on a lot of trades.
Your task, when developing your system, is to find a compromise between the two goals. Find a way to identify trends early, but also find ways that will help you distinguish the fake signals from the real ones.
In theory, this should eliminate all biases and emotions in your trading, because you are supposed to follow the rules of your system NO MATTER WHAT.
If you do a simple search in Google for “forex trading systems” you will find many many people out there who claim to have the “Holy Grail” system that you can purchase for “only” a few thousand dollars.
These systems supposedly make thousands of pips a week and never lose. They will show you supposed “results” of their perfect system and it will make your eyeballs turn into dollar signs as you sit there and say to yourself, “wow I can make all this money if I just give this guy $3,000. Besides, if his system making thousands of pips a week, I’ll be able to make my money back in no time.”
There are some things you should know before you give them your credit card number and make that impulse buy.
- The truth is that many of these systems DO in fact work. The problem is that traders lack the discipline to follow the rules that go along with the system.
- The second truth (there's such thing as a second truth?) is that instead of paying thousands of dollars to buy a system, you can spend your time developing your own system for free, and use that money as capital for your trading account.
- The third truth is that creating systems is not even that difficult. What is difficult is following the rules that you set when you do develop your system.
This lesson will guide you through the steps you need to take to develop a system that is right for you. At the end of the lesson, I will give you an example of a system that I trade just so I can show you how awesome I am! (insert evil laugh here).
Goals of your trading system
I know you’re saying, “My goal of my trading system is to make a billion dollars!” While that is a wonderful goal, it’s not exactly the kind of goal that will make you a successful trader.
When developing your system, you want to achieve 2 very important goals:
- Your system should be able to identify trends as early as possible.
- Your system should be able to avoid you from whipsaws.
The hard part about those goals is that they contradict each other.
If you have a system who's primary goals is to catch trends early, then you will probably get faked out many times. On the other hand, if you have a system that focuses on avoiding whipsaws, then you will be late on many trades and will also probably miss out on a lot of trades.
Your task, when developing your system, is to find a compromise between the two goals. Find a way to identify trends early, but also find ways that will help you distinguish the fake signals from the real ones.
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