Do you use 100% mechanical trading systems?

I’m just wondering who else here ignores charts and only uses mechanical trading systems and what people think of that approach.

“100% mechanical systems” don’t exist. All mechanical systems are designed and operated by humans.

Some humans like to pretend that 100% mechanical systems do exist so that they have someone beside themselves to blame when they suffer trading losses.

Some traders like to design and build their own systems that mechanically output entry and exit orders which the trader can then place with his/her broker.

Some even go as far as setting up an API with their brokers to enter and exit positions automatically.

Isn’t that 100% mechanical then?

The issue lies more within how well the trader adheres to his system. If stops and TPs are set at order entry and never touched again…if entries are defined by specific signals/checks, then in essence you do have a mechanical system. The psychology of trading however leads traders to pull the trigger early, sometimes too early.

I believe a mechanical system is important when it can be proven profitable. Sticking to it is the tougher part.

ignoring charts does’nt necessarily mean you’re using a 100% mechanical system. A 100% mechanical system could very well have charts.

In his book “Beyond TA” the great Tushar Chande along with legendary commodities trader Stanley Kroll writes the avergae trader has his best chance of success in the markets by using a mechanical trading system. According to him this is because psychology is a major factor in trading success and the average person will at some time be unable to control their emotions. By following a mechanical trading system their is no element of descretion left to the trader. They are given a specific set of rules encompassing all aspects of a trading system and all they have to do is pull the trigger … (which in itself is sometimes a hard thing to do but not as hard as making your own trading decisions and you therefore stand a better chance of success)

The drawback however is that markets change and you will find at some point of time the system no longer works.

This approach was proven by Richard Dennis’s famous turtles experiment. A good book to read regarding this subject is “Way of the turtlle” by Curtis Faith (supposedly one of the best of Dennis’s turtles). I have this book in audio format and if anyone is interested contact me and i’ll pass it on.

In my humble opinion its one of the better books out there on trading systems and the whole turtle saga in general.

A good video to watch on the subject of mechanical trading systems in general, and specifically the turtle system is Russels Sands (one of the original turtles who is still trading) seminar conducted in Australia in 2005 (I think) on youtube. He says the 100% mechanical turtle system still works and raked in 100 million dollars in 2004.

I have just finished backtesting a mechanical system, and will start testing it in demo on next market open. For me mechanical is one that has no “maybe” and nothing is left to the traders interpretation, but uses very simple and very very clear rules. The system can have charts and mine does.

I find it’s the only way I can trade, when I lose any one trade my judgement isn’t on the line it’s an expected part of the system, when I haven’t got a system to follow my emotions come into play and I lose.

Davidee,

Well said, but I would take this a step further; even if I trade according to my system, during drawdowns I start questioning various thing about how I designed my system. I know that I’ve designed a sound system, yet emotions are still part of the game.

I think mechanical systems are beneficial in that they 1) force a trader to write clear rules and 2) allow for proper backtesting 3) give a trader confidence in his/her system but they are not a way of dealing with the emotions that trading brings about. Emotions come up whether you’re trading a discretionary or mechanical style.