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Mechanical trading systems trade the same way every time the same market parameters present themselves.  This brings consistency into your trading decisions.  More importantly, it can bring stress-free trading into your day-to-day trading life!

Trading can be stressful enough without having to add the stress of “on the fly” trading analysis.  Most humans are ill-suited and poorly equipped to trade the markets.  The efficient marketplace rebalances inequities so quickly that trading opportunities are short-lived.  All traders suffer from Fear and Greed, and most need multiple validations before taking a trade.  Since they are ill-suited in general, they lose money and that adds to the stress, which adds to the Fear and Greed, which adds to the stress, etc., etc., etc.

What Are the Many Advantages of Mechanical Trading Systems?

The primary advantage of a mechanical trading system is that it provides traders with an unemotional, rule-based, consistent methodology to trading. The benefit is that a rule-based methodology can be tested against historical price data to determine historical profitability. Subjective approaches cannot even be defined and, hence, can’t be tested.   Accordingly, they cannot be proved or disproved profitable.  Another major benefit of a mechanical approach which uses technical indicators is that investment decisions are not influenced by rumor, poor fundamental analysis, news, or questionable accounting practices.  Human emotion, consistently cited by most experts as a major contributing factor to poor investment performance, is completely eliminated.

Would You Rather Be Stressed or Relaxed While Trading?

Subjective traders try to remember all the things they learned in technical analysis and then they follow multiple conflicting indicators.  Trading in this manner is very stressful.  Mechanical traders have already decided to follow the system signals.  They just need to relax and focus on one thing: getting the best execution possible, and to just trade the system’s signals.

What Are the Disadvantages of Trading a Mechanical Trading System?

The most commonly cited objection is that a mechanical trading system cannot adjust to changing market conditions like a human being can.  We believe that depends on the mechanical system being used.  You should look for a mechanical system that self-adjusts to changing market conditions.  We believe another important component of a successful mechanical trading system is one that factors price action and trading volume into its algorithm since these are the only 2 pieces of data given in real-time by the exchanges.  

What about Backtesting?

Backtesting can be a useful tool if used correctly.  Unfortunately many system developers and vendors do not use it correctly in their bid to make a quick sale.  We have previously made the point that an important plus of mechanical trading is at least you are consistent in your methodology over time.  Accordingly, using the same parameters one can go back in time and see how the strategy would have fared in different markets and different time frames.   While past results in no way predict future performance, if you can at least get a successful historical backtest using the same settings and parameters that you plan on using going forward, you know you have at least a fighting chance for success in the future.

Beware of Optimized System Performance Summaries: 

What is the most dangerous trap most buyers of mechanical trading systems fall for?  Overemphasizing the value of historical performance summaries. Be very careful about buying any trading system that has an optimization capability.  The temptation by the vender to make his strategy look its best is usually too strong.  So with the push of one button, he optimizes the system parameters and settings and then shows you a wonderful historical performance summary.  He claims you will have similar trading success going forward. (What “optimization” basically does is slowly varies system parameters and settings until it gets the right combination of variables and settings to produce the most profitable, historical trading result.)  We have found that most optimized systems are doomed to failure as no market exactly repeats past historical price movement.  It’s much better to use a self-adjusting system and to test it UN-optimized on various historical markets.  Then ask to see it demonstrated LIVE in real-time.

Man vs. Machine – A Live Trading Challenge:

This was a picture-perfect trading session which exposed nicely the significant differences between Subjective and Mechanical trading.  We’d like for you to see the difference between human subjective trading versus machine non-subjective trading.  Below is a link you can click that very clearly demonstrates the difference between the two types of trading.  TsuBot (pronounced like the words “Sue-bot”) is the mechanical trading system put out by Tsunami Trading Educators, Inc.  In the video, you will watch TsuBot being traded live against a premier Hedge Fund manager, book author, and professional trader.  While both traders made money, we feel TsuBot acquitted herself quite well in this live trading challenge.  We think after you watch the video you will agree!

The question you want to ask yourself while watching this video is “Which trader do I want to be like?”  “Which trader can I be like?”   We feel the answer is obvious, but we will let you make up your own mind.

"Live Trading Challenge: Real Profits, Losses, and Lessons"

http://www.moneyshow.com/video/details.asp?ret=nr&wkspID=80BAC4F4A99647C09FDC1043C5152DCB&scode=014837