Mechanical Trading Systems: Pairing Trader Psychology with Technical Analysis

GENERAL RULES OF THUMB

Filters

Although I encourage readers to experiment with the addition of various filters to the simple trend-following systems just outlined, I believe that the more conditions added, the lower the probability of replication of similar results in the future. Even though the backtested results just shown entail large peak-to-valley equity drawdowns, low percentage of winning trades, and mediocre rate of return, I prefer knowing that my backtested drawdowns have less likelihood of being exceeded in the future. This gives me greater confidence during the weathering of real time equity drawdowns. This psychological confidence during drawdowns factor should not be underestimated, because it is our ability to stick with the trend-following system during a string of consecutive losses that will determine our success as trend-following system traders.

As opposed to optimizing the results of simple trend-following systems through the addition of multiple filters, I prefer to accept a low percentage of winning trades and large consecutive string of losing trades, and instead focus my efforts on development and disciplined adherence to stringent price risk management techniques that are robust enough to weather all equity drawdowns except those that entail a questioning of the system's continued viability.

Trending Asset Classes

In reviewing portfolio results of these trend-following systems, time and again we see that specific asset classes produced the lion's share ...