Mechanical Trading possible ?

[new_trader]

Interesting read.

Just one question. Why is it that people belive that 100% mechanical systems do not exist or can not be created? Surely this is dependant on your trading style and method ?

Is this reference to a trading record that does not win 100% of the time or are we talking about other factors?

I understand that markets change over time but that does not mean that a trend does not exist during these changing phases. There for if you are trading a trend based system, the trend can exist in any timeframe, then your system should still work.

Or are you trying to say that it is difficult to identify the trend and when it begins to change ?

I ask this because i am in the process of creating a mechanical system. To me this means having a rigid set of rules that are very clear and can be clarified in code. Also i should be able to trade this system manually with equal success.

If i can manually produce X% winners using my system manually, why should this be different when programmed mechanically?

The problem is this, and I will explain with an analogy.

Imagine you are blindfolded and put somewhere in a large unfamiliar desert. The blindfold is removed and you are told that you have to find your own way out. You are only given one clue which is "If you walk in the right direction you should make it to safety before you die of thirst".

So, all you have to do is choose a direction and walk it. The question is, how far do you walk before you are convinced you are walking in the wrong direction? This is where the real psychological battle takes place. You might think you are going the right way and safety might be just up ahead a little further...a little further....a little further, or you might convince yourself you should take a new route in the opposite direction.

In this example, direction isn't an analogy for market direction; instead it is an analogy for drawdown.

People who insist on taking the mechanical route because it eliminates emotions from trading are fooling themselves and those foolish enough to listen to them. When your mechanical system has produced 10,11 even 15 losses in a row and your account is in 30% or 40% drawdown and has been for 3 months, will you continue trading it without any emotion? Honestly? Will you be able to convince yourself that the next trade or the next one or the one after that is going to be a big winner and not another loser? Will you be able to do this without any emotion whatsoever? Honestly?

 

[sirviente]

Hello New_Trader

Thank you for your comments, the idea of mechanical trading is to "remove" the pain of trading, and of course, in theory, that it would be able to make money steadily as compared to a human and its emotions. But as you were saying, one cannot escape the challenge of facing one's own emotions, because emotions come anyway, sooner or later. Most people handle these emotions by taking a 9 to 5 job, which seems to me as the worst solution.

Its like the winter and summer season, these emotions happen anyway, whether we want it or not.

I was hoping to hear someone that was doing 100% mechanical trading to know if there was something clear to aspire to. But the results are just the opposite. Unless i would be a multibillion dollar corporation, i don't have enough funds to do the kind of research to pull off an automated solution (like those guys who used 200 playstations to hack a 128 SSL encryption...).

Regards,
sirviente

 

[new_trader]

Hello New_Trader

Thank you for your comments, the idea of mechanical trading is to "remove" the pain of trading, and of course, in theory, that it would be able to make money steadily as compared to a human and its emotions. But as you were saying, one cannot escape the challenge of facing one's own emotions, because emotions come anyway, sooner or later. Most people handle these emotions by taking a 9 to 5 job, which seems to me as the worst solution.

Its like the winter and summer season, these emotions happen anyway, whether we want it or not.

I was hoping to hear someone that was doing 100% mechanical trading to know if there was something clear to aspire to. But the results are just the opposite. Unless i would be a multibillion dollar corporation, i don't have enough funds to do the kind of research to pull off an automated solution (like those guys who used 200 playstations to hack a 128 SSL encryption...).

Regards,
sirviente

sirviente,

Maybe you are missing the obvious.

"I was hoping to hear someone that was doing 100% mechanical trading to know if there was something clear to aspire to."

You won't hear form someone because they don't exist. What you really mean when you say that is you are hoping that someone tells you what you want to hear and will continue to ignore those that tell you what you need to hear.

Even if someone tells you that profitable mechanical trading is possible with minimum effort, then what? Will they tell you what they know? Will they give you their 'system'?

You are going to eventually face the ugly fact one day, better sooner than later - There are NO SHORTCUTS.

But trying to convince you (and all the others that persist with the mechanical route) of this fact is like trying to convince a 3 year old child that the Fisher Price Laugh & Learn™ Roll-Along Turtle might be the only toy you will ever want but in a year or two you will grow out of it and never touch it again.

 

[everyonerich]

mechnical trading possible = wrong questions.

all fundamental or mechanical will fail, correct questions is you should ask what you can do if fail.

 

[Citizen2007]

The problem is this, and I will explain with an analogy.

Imagine you are blindfolded and put somewhere in a large unfamiliar desert. The blindfold is removed and you are told that you have to find your own way out. You are only given one clue which is "If you walk in the right direction you should make it to safety before you die of thirst".

So, all you have to do is choose a direction and walk it. The question is, how far do you walk before you are convinced you are walking in the wrong direction? This is where the real psychological battle takes place. You might think you are going the right way and safety might be just up ahead a little further...a little further....a little further, or you might convince yourself you should take a new route in the opposite direction.

In this example, direction isn't an analogy for market direction; instead it is an analogy for drawdown.

People who insist on taking the mechanical route because it eliminates emotions from trading are fooling themselves and those foolish enough to listen to them. When your mechanical system has produced 10,11 even 15 losses in a row and your account is in 30% or 40% drawdown and has been for 3 months, will you continue trading it without any emotion? Honestly? Will you be able to convince yourself that the next trade or the next one or the one after that is going to be a big winner and not another loser? Will you be able to do this without any emotion whatsoever? Honestly?

Thats a good analogy, but one that applies to beginners in trading. Anyone who is going down the road of automation will,i assume, have a solid system that works manually with a rigid set of rules. If this is not the case then they are doomed to failure.

Any trader who has such a successful trading system obviously has a very good grasp on the market, its cycles and price movements. Also any disciplined trader will not allow 30%/40% draw downs on any system, that is in itself another trade in the other direction.

Yes drawdowns exist and can not be entirely eliminated, but they can certainly be minimised. The extent to how much you can minimise them is down to your skill on understanding the market and secondly and probably more importantly, programming skills. Most of the parameters that create big drawdowns for successful manual systems are programming skills.

Personally i am in the middle of developing a 100% mechanical system. The parameters are very clear, they work manually very very well. Under programming they have produced great entries. The not so great entries are also very clear, but the difficulty is in defining a way to program them at this stage. This is a very important aspect that i discovered for myself, watching my system trade automatically and being able to identify which ones were going according to plan and which ones were not. This was due to programming issues.

As with manual trading you have to identify three things:
1./ Is the market in an uptrend?
2./ Is the market in a downtrend ?
3./ Is the market in a sideways mode?

Once these are quite clear, the same can be applied to the mechanical method.

However unlike manual systems where entries are easy and exits are difficult, i find it is the opposite with mechanical systems - exits are very easy, entries are harder, partly for the reasons you mention concerning drawdowns.

I do think 100% mechanical systems exist, just like the EA's that run by themselves, profits aside. I am also certain many traders are using them but not coming out in the open.

However i dont think beginners will be successful in trying to eliminate emotion using a mechanical approach, as you said there is no shortcut . You cannot program something if you do not have clear directions in the first place, these will only be developed by manual perfection.

 

[ZEPPO]

I was hoping to hear someone that was doing 100% mechanical trading to know if there was something clear to aspire to.
sirviente[/QUOTE]

Sirviente, I'm afraid that what you are after does not exist - in trading, you cannot buy success, you've got to work hard at it and go thorugh a lot of pain; anyone who tells you otherwise is full of beans!
Mechanical systems work if you know of to use them, and that requires staff and money.
To make money trading, as a private trader, you've got to develop your own system, based on your own needs (what return on your capital you are after, for example) and your attitude to risk (psychlogy).
Only you know these variables; then you've got to trade, trade and trade - practice makes perfect.
Forget about controlling emotions - you won't be able to, unless you don't care about your capital.
Develop a system with positive expectancy, entry and exit techniques, appropiate risk management and go for it - it is the best you (or anyone else for that matter) can do, and run your trading activities for what they are: a business venture.
Good luck.

Eduardo.

 

[new_trader]

Citizen2007,

Imagine being 15 years old, looking back over your life and coming up with a strict set of rules to live by. Do you think you could stick to these rules as you grow and learn new things and have new experiences? No, you couldn't. Your progress in trading is no different. But, you feel that it is possible to construct a mechanical trading system that you must adhere to! This makes the dangerous assumption that you know everything there is to know about trading when you develop your 'system'.

I would bet any money that people do not thoroughly test and scrutinise their systems deeply because if they did they would be horrified at the results.

"down to your skill on understanding the market"

This is the most important thing you said. Yet you overlook it, or even worse, you dwarf its importance with everything else.

Anyway, I have tried before to get people to understand what I am saying and have failed. For some strange reason people insist on going the mechanical route when if instead that put that same time and effort directly into study and practice they would make leaps and bounds in their progress.

I absolutely give up now. No offence, but I think this is going to be something you and everyone else must learn the hard way.

 

[Citizen2007]

Citizen2007,

Imagine being 15 years old, looking back over your life and coming up with a strict set of rules to live by. Do you think you could stick to these rules as you grow and learn new things and have new experiences? No, you couldn't. Your progress in trading is no different. But, you feel that it is possible to construct a mechanical trading system that you must adhere to! This makes the dangerous assumption that you know everything there is to know about trading when you develop your 'system'.

I would bet any money that people do not thoroughly test and scrutinise their systems deeply because if they did they would be horrified at the results.

"down to your skill on understanding the market"

This is the most important thing you said. Yet you overlook it, or even worse, you dwarf its importance with everything else.

Anyway, I have tried before to get people to understand what I am saying and have failed. For some strange reason people insist on going the mechanical route when if instead that put that same time and effort directly into study and practice they would make leaps and bounds in their progress.

I absolutely give up now. No offence, but I think this is going to be something you and everyone else must learn the hard way.

New Trader, no offence taken whatsoever, i think its a healthy discussion with a civilised expression of views. Most welcome.

I am not sure i agree with your analogy here of a 15 year old. Like trading this is all down to personal experiences and what one wants out of life. That, without a shadow of a doubt, cannot be said about everybody.

As i said earlier, whether you are trading manually or mechanically, rules that must be obeyed are required in both situations. Any one who has put in the hard work will have developed these rules. You cannot follow the rules if you do not understand what is happening or if you are not prepared, thus so many lack discipline when following systems. This is a topic for another thread so lets not go there now.

If you have a set of rules, what is the difficulty in automating them? Programming skills?
About knowing all there is to know about trading. Whats so dangerous about it? no danger at all. I have identified what works for me, what i can deal with and clear strategies on how to, why worry about the rest?

Down to the skill on understanding the markets.

Not sure how you mean I have overlooked it. Its is not dwarfed at all, in fact EVERYTHING i do in the trading arena is based on it, from my discussions, to my analysis, my planning, my systems and my opinions. EVERYTHING ELSE in comparison is dwarfed, my apologies if i did not give this impression, but it will be very personal. Some people will know where i am coming from, others will think i am out there on Mars or something, thats ok.

This is the biggest industry in the world. The top traders earn hundreds of millions, other good traders earn millions. What says that only they can achieve that level of success and you or I cannot? I am sure that many people on this website who are not yet trading ,or not making a profit persist because they see an opportunity here. Everybody is trying to find a way to make the most of it. As in any industry some will do it and some will not. Trading is not impossible , it is just the perspective you look from.

 

[new_trader]

As i said earlier, whether you are trading manually or mechanically, rules that must be obeyed are required in both situations. Any one who has put in the hard work will have developed these rules. You cannot follow the rules if you do not understand what is happening or if you are not prepared, thus so many lack discipline when following systems. This is a topic for another thread so lets not go there now.

But we have to go there now because this is the very essence of my point. Nobody (I imagine) who trades in a discretionary manner now is trading with exactly the same methodology they used when they first started. I certainly am not, the reason being that you make new discoveries and have new realisations as you progress. Mechanical systems don’t allow for this because they are back tested with a rigid set of rules that shouldn’t be tampered with. If you are constantly modifying your system then you are not trading mechanically by its strictest definition and therefore cannot program a set of rules. This is why these ‘discussions’ go in endless circles. People argue and argue about the merits of back testing in order to develop a ‘mechanical’ trading system and then feel it’s perfectly valid to tweak it after 20 trades because they get a few losses or have the urge to interfere with it because they think they know better or because they use the old cliche..."The Market has changed"

 

[Citizen2007]

But we have to go there now because this is the very essence of my point. Nobody (I imagine) who trades in a discretionary manner now is trading with exactly the same methodology they used when they first started. I certainly am not, the reason being that you make new discoveries and have new realisations as you progress. Mechanical systems don’t allow for this because they are back tested with a rigid set of rules that shouldn’t be tampered with. If you are constantly modifying your system then you are not trading mechanically by its strictest definition and therefore cannot program a set of rules. This is why these ‘discussions’ go in endless circles. People argue and argue about the merits of back testing in order to develop a ‘mechanical’ trading system and then feel it’s perfectly valid to tweak it after 20 trades because they get a few losses or have the urge to interfere with it because they think they know better or because they use the old cliche..."The Market has changed"

What you say here is also my point, but from the opposite perspective. I agree that you will have new realizations and discoveries, these are all pieces towards the complete picture, extending your knowledge outwards so you can build a boundary for your understanding.
There will come a time, as in any field, that you will have gained enough experience and the boundary walls will become more and more rigid. At this stage you have an understanding of the market and its structure, the way YOU understand it.

From then on all decisions will be influenced by what lies within these walls, you now have your map, how you navigate around it is up to you. On the map you know how to get from A to B and from E to Z, no one else will have any clue as to what you are doing, but when they discover it, there map will not be too different from yours. Thats because there is only one market and price moves the same way on everybodys screens. The only difference is how we perceive it and how we react to it.

There is a beginning to a trend on eg GBPUSD at a certain time, that beginning is the same for ALL traders, the difference is how many can identify it and be CONFIDENT in trading it. How you learn to identify it will also determine how you trade.
Here you will develop your manual trading, from there you will go into more finer detail, then you have a foundation for your mechanical system, not based on a set of circumstances with a high probability, but based on a clearer understanding of how these occur.

Once at this stage, who says that you cannot teach your mechanical system to trade with discretion.

Now thats a lot of work. I never said it was easy.

Sorry for the ramble, not sure if I answered any of your question though.

PS: I dont believe in backtesting , always test my systems on a live dummy account. This way i can see where it is following the rules or not, or whether the programming needs changing.

 

[new_trader]

It's clear that you and I have a VERY different definition of a mechanical trading system.

To me, the only way you can say that you are truly eliminating emotions from trading with a mechanical system is if you do the following:

1) Choose an instrument you want to 'trade'
2) Buy all the historical data you can afford
3) Spend the next X number of days, months, weeks, back testing by plugging and praying, poking and hoping until you end up with an equity curve you are happy with.
4) Find a way to automate it, either through a broker that allows automated trading or using your own computer.

And that’s it. You don't sit down and watch Bloomberg to find out what the markets are doing, you don't read the Financial Times or read through these forums to find out if you should be buying or selling. You do only one of two things:

1)Top up your account whenever you broker demands more margin or
2) Top up your Martini

If you are not trading this way then you are NOT a mechanical system trader, you are a pseudo-mechanical or pseudo-discretionary trader, whichever you prefer. But I can assure you of one thing, after a while, as your experience and understanding develops, the ‘mechanical’ part will become obsolete.

Once at this stage, who says that you cannot teach your mechanical system to trade with discretion.

I am not sure of your trading experience but judging by this statement I would say you don't have much (forgive me if I'm wrong). I'd say you don't have much programming experience either.

 

[Citizen2007]

It's clear that you and I have a VERY different definition of a mechanical trading system.

To me, the only way you can say that you are truly eliminating emotions from trading with a mechanical system is if you do the following:

1) Choose an instrument you want to 'trade'
2) Buy all the historical data you can afford
3) Spend the next X number of days, months, weeks, back testing by plugging and praying, poking and hoping until you end up with an equity curve you are happy with.
4) Find a way to automate it, either through a broker that allows automated trading or using your own computer.

Then you probably dont understand ALL the psychology behind the emotions (forgive if i am wrong).

And that’s it. You don't sit down and watch Bloomberg to find out what the markets are doing, you don't read the Financial Times or read through these forums to find out if you should be buying or selling. You do only one of two things:

1)Top up your account whenever you broker demands more margin or
2) Top up your Martini

That is correct and that is precisly the end goal.

If you are not trading this way then you are NOT a mechanical system trader, you are a pseudo-mechanical or pseudo-discretionary trader, whichever you prefer. But I can assure you of one thing, after a while, as your experience and understanding develops, the ‘mechanical’ part will become obsolete.

I disagree. As your experience and understanding develop, it is the mechanical part that will rule, the discretionary part will become obsolete.



I am not sure of your trading experience but judging by this statement I would say you don't have much (forgive me if I'm wrong). I'd say you don't have much programming experience either.

It is because of my experience that i make such statements, these are not just theories I am thinking in my head but actual things I am doing everyday. As for programming, you are right, i do not have a lot of experience but I am improving daily. Experience aside, i know precisely what i require the programmer to do.

Also like we have both said before, Mechanical Trading is not an answer to eliminate emotion from your trading, but it can be an extension of your existing trading methods, this will in turn have an effect on your emotions.

 

[new_trader]

I disagree. As your experience and understanding develop, it is the mechanical part that will rule, the discretionary part will become obsolete.

There is a difference between trading with a mechanical set of rules and executing your trades with mechanical dispassion

I know precisely what i require the programmer to do.

Yes, a simple statement.

I sort of now think we've been debating nothing. We basically agree-You must understand how to trade the markets before you have any hope of automating a trading methodology. However my view is, once you understand how to trade the markets you realise there is no hope of automating a trading methodology.

Good evening to you, this was fun.

 

[Citizen2007]

However my view is, once you understand how to trade the markets you realise there is no hope of automating a trading methodology.

Good evening to you, this was fun.

You are right as this is a personal thing. Just remember that price itself has to follow a certain protocol, it can not and does not just move without leaving footprints. These are visible with the lagging indicators, something there in hindsight must have been there before. It is developing the foresight that will shed light on what we have just discussed.

Good health, plenty of wealth and lots of wisdom to you my friend.

 

[Hammer61]

Hello

Im new here but have been trading for a number of years, im Sydney based and 100% mechanical.

I failed miserably as a fundamental trader but as a mechanic have done very well, is it easy ?, in my experience when you start its very hard but gets easier as you accept the looses that are inevitable, i actually tried 3 times before i was successful, one thing that i think is critical is risk, i only bet small so on some markets i have win rate of less than 20% at the moment but as anyone who makes money in the markets knows that doesnt matter as long as when you do win you make it count, as the old saying goes cut your losses but let your profits run.

Big plus to being able to trade mechanically is too switch off to whats happening in the markets, folllow your rules no matter what as the best moves come when least expected and that often means going against the crowd, today i will be shorting the S&P500 as soon as the floor session starts, chances are i will be stopped out but my risk is only a few points so like the last 8 trades ive had i will be stopped out pretty quickly but that's life as a mechanical trader, all it will take is one good trade and i will cover them all and some, get 2 or 3 good trades in a week and im streets ahead.

All the best

H61

 

[sirviente]

How many years ?

Hello

Im new here but have been trading for a number of years, im Sydney based and 100% mechanical.

I failed miserably as a fundamental trader but as a mechanic have done very well, is it easy ?, in my experience when you start its very hard but gets easier as you accept the looses that are inevitable, i actually tried 3 times before i was successful, one thing that i think is critical is risk, i only bet small so on some markets i have win rate of less than 20% at the moment but as anyone who makes money in the markets knows that doesnt matter as long as when you do win you make it count, as the old saying goes cut your losses but let your profits run.

Big plus to being able to trade mechanically is too switch off to whats happening in the markets, folllow your rules no matter what as the best moves come when least expected and that often means going against the crowd, today i will be shorting the S&P500 as soon as the floor session starts, chances are i will be stopped out but my risk is only a few points so like the last 8 trades ive had i will be stopped out pretty quickly but that's life as a mechanical trader, all it will take is one good trade and i will cover them all and some, get 2 or 3 good trades in a week and im streets ahead.

All the best

H61

Hello Hammer61,

How much time did it take for you to begin having profits ?

Regards,
Sirviente

 

[mechanicaldaytrader]

re: "only bet small so on some markets i have win rate of less than 20% "

....being wrong over 80% of the time is not something I could live with...being RIGHT 80%+ is something that I aim for (and achieve most of the time).

 

[Hammer61]

Sirviente

This is from my own personal experience, i think we are all different, like trying to learn to ride a bike as a kid, some get it straight way others it takes time and some give up.

It took a while before i made money, probibly about 3 years with all the stopping and starting, each time i stopped the account was down about 25%, but getting into trading mechanical systems can be quite hard and its very easy to get into the habit of breaking your rules, picking and choosing trades plus when a drawdown comes you start questioning your whole system, each time i started it seemed i was jinxed and the drawdown also started, so after a month or 2 i convinced myself the system didnt work anymore.

the 3rd time however, i started with a few good wins and that was a real tonic, from there i started to accept the drawdowns and just went with them, as my account increased i added more markets and contracts traded, maybe like any business when you first start you have to take more risk, so the risk of failure is greater, think the main thing is to prove to yourself your system works over time, backtest it and try and find the flaws in it, make sure its robust in all market conditions, also accept it is going to have bad period, maybe months or years of doing badly but if your only taking a small risk then compared to the gains you make when its going well its not going to wipe you out.

My percentage risk these days is very small but i trade 8 markets so i keep in mind my potential worst case loss should i get hit all at the same time, i also consider currency fluctuations so that also impacts on mow many contracts i trade, overall i run at about an average of 36% winning trades but that's across all markets, as i posted before 1 market im running below 20% at the moment and its actually in the black by a bit this year due to one solitary huge trade, if i was just trading that market however it would be very hard as mechanicaldaytrader has said also.

good luck with your journey and remember the story of Robert the Bruce and the spider !!!

 

[new_trader]

Hello Hammer61,

How much time did it take for you to begin having profits ?

Regards,
Sirviente

Sirviente,

I think you should look at the differences between discretionary and mechanical trading in the same way you would a pension scheme and a job.

Mechanical trading is like a pension scheme in that your capital builds up very slowly over a long period of time, but with no guarantee. You can't expect to live off it until the money pot is large enough to draw an income from without adversely affecting its performance.

Discretionary trading is like having a skilled job. You get better with time and experience but and you draw a regular income from it (generally)proportional to the time and effort you put into it.

You are WASTING YOUR TIME AND EFFORT searching for a mechanical system that is going to give you the performance of a discretionary methodology. It ain't gonna happen and more importantly, nobody who professes that it is possible, or that they are doing it, is going to give you their system freely. You really are wasting your time here.

 

[Hammer61]

Sirviente,

I think you should look at the differences between discretionary and mechanical trading in the same way you would a pension scheme and a job.

Mechanical trading is like a pension scheme in that your capital builds up very slowly over a long period of time, but with no guarantee. You can't expect to live off it until the money pot is large enough to draw an income from without adversely affecting its performance.

Discretionary trading is like having a skilled job. You get better with time and experience but and you draw a regular income from it (generally)proportional to the time and effort you put into it.

You are WASTING YOUR TIME AND EFFORT searching for a mechanical system that is going to give you the performance of a discretionary methodology. It ain't gonna happen and more importantly, nobody who professes that it is possible, or that they are doing it, is going to give you their system freely. You really are wasting your time here.

Sorry New trader but i don't agree with alot of that, yes trading is like a job and like learning any new job, success in most cases doesnt happen overnight, experience counts for alot.

Discretionary trading is one of the hardest jobs in town and very few will make it, Mechanical trading though IMO is very much underestimated, takes time to accept and adjust too and to be honest once you have a system up and running its very boring.

As to performance a good mechanical system will do very well, the last 3 years i have returned over 100% each year even though at times some markets have been in drawdown. ive also had alot of slippage and been caught the wrong side of a market going "limit down" and believe me that trade i was well and truly taken to the cleaners.

Yes there is no certainty with a mechanical system but so is there for Discretionary !, in fact if anything i can look back over the years and see im going to have bad years but by trading a portfolio and using good money management those lean times are going to be controlled and hopefully offset by other markets having a good year and so far that has been the case.

Although initially i didnt draw any income from my account as i built it up, i would imagine a good discretionary trader would do the same ?, now i do on a regular basis so its nothing like a pension fund its more like a job !.

To compare mechanical trading to a pension fund and discretionary to having a job to me is way way off the mark, but as in life each to there own