A Mechanical Trading System that Works

“He who fails to plan, plans to fail” – attributed to Alan Lakein.

There is no doubt that you can spread bet without formally adopting a trading system. You can glance at the charts, act on news items, and perhaps achieve some success. However, most people who have traded for any length of time will tell you that you need a strategy, implemented by a trading plan, to have the best chance of long-term success.

A mechanical trading system takes care of the implementation of a strategy, either by trading for you or by giving you direction on the spread bets to make. To call it a mechanical trading system is somewhat misleading, as a mechanical trading system is usually implemented not by anything mechanical but by a computer program; the “mechanical” in the name simply means that it performs the same programmed actions over and over again mechanically.

At its heart, a mechanical trading system is based on a set of rules. These rules are often programmed into a computer so that they are consistently applied, although you could have a manual mechanical trading system where you do all the work, following the set of laws that make up your system.

Depending on your level of experience, you will know or will find out that it is very difficult to stick to your plan when you are actually trading with real money. No matter what you think you can do, the emotions involved when you are watching your fortunes rise or fall can significantly influence your decision making. This is one of the reasons that a mechanical trading system is frequently recommended.

Another reason to use strict guidelines is that your spread bets are repeatable, and therefore you can review and perhaps improve the strategy that you have chosen. If you choose your trades on a whim, then you have less chance of consistently improving.

With a mechanical trading system you are able to back test your strategy, checking how it would have performed in the past, and so “proving” it can make a profit. This in turn makes it much easier mentally to stick to your trading strategy, even if you have several losses in a row, something which is bound to happen many times during your trading career.

You will find many offers of mechanical trading systems, particularly for the Forex market because of its current popularity, and you can spend hundreds of pounds buying computer programs that have a demonstrable track record. The fact that these are sold rather than simply used by the developers to create profit may make you wonder whether they work at all.

The answer to this is a definite maybe. Mechanical trading systems take care of much of the more difficult side of evaluating and keeping track of your spread bets, and are a useful tool. However, as with all tools you have to build your experience in using them, and have some idea of their functioning and purpose so that you can use them effectively.

Certainly, you should not start using a mechanical trading system with the thought that you will ignore the directions when you feel like it, as then you lose many of the advantages; however, markets have different trading conditions that need different approaches, and you should know enough about the market and the system to recognize if it is an appropriate method, and how to adapt it to your current needs.

This means that you still need to study technical analysis and the process of spread betting so that you are aware of any strengths and weaknesses in the mechanical trading system you have chosen. The system has not been invented that can be bought by a total novice, and churn money out the other end – obviously, for the evident reasons.

Should you use a mechanical trading system? This depends on your level of experience, as well as your emotional connection to the craft of trading, and the type of markets that you are going after. The alternative method of discretionary trading is fraught with danger for those who are unprepared, or unwilling to commit to the work involved. If this is the case, the worst that can happen by operating a mechanical system rather than applying discretion is that you will lose your trading account less quickly.

On the other hand, if you have a trading strategy which has been proven either by back testing or by live trading, and you can stick with it through the ups and downs of the markets, then a mechanical trading system may be the answer to making a decent profit. Remember that with trading, and the short time frames involved, one trader’s gain is another trader’s loss. Your task is to become an informed spread better, and operate more effectively than the majority of traders who are doomed to lose money.

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