Considering I am a huge advocate for mechanical trading, I thought that this week I would give a definition to all those that are interested and share the ten benefits of mechanical trading.
For most, mechanical trading is a relatively new concept requiring explanation in itself.
Mechanical Trading- definition:
Mechanical trading is defined as using a distinct set of well defined rules which instruct the trader when to execute and how much to place in each trade. It is a method of trading that employs unambiguous entry/ exit criteria and strict risk and money management rules.
The unambiguous criteria and rules are devised through rigorous research or price action in a chosen market. The outcome is a structured, well organised approach to active investment that is based on empirical evidence from 1000’s of trades that result in the calculation of a probabilistic edge that, if achieved in live trading, will by definition deliver profits.
By following the mechanical rules active investors immediately get the benefit of the historical research.
Mechanical trading executed correctly will exclude the undue influences of emotion, prejudice and bias. It will build trust and confidence and achieve consistency and objectivity.
Here are my top 10 benefits from Mechanical trading. A mechanical system:
1. that has a researched and positive statistical edge puts the odds in our favor.
2. provides a framework to run our investing business efficiently.
3. provides structure, rigour and process to protect and grow capital.
4. allows us to follow consistent rules and processes which are repeatable.
5. allows us to measure our consistency, objectivity, and trade execution ability.
6. allows us to think in terms of probabilities rather than in single market events.
7. allows us to become process focused rather than outcome focused.
8. allows us to react to market price action rather than subjective ‘noise’.
9. allows us to accept that each individual trade has an uncertain outcome.
10. allows us, over a large sample of trades, to achieve certainty in an uncertain environment.
Using a mechanical trading system can be defined as a method of timing the market by generating unambiguous trading signals but truthfully a mechanical system provides us with so much more. Its greatest benefit is that it enables us to overcome our fears, frustration, and second guessing mindset which inevitably is destructive to every trader and investor.