Mechanical Trading Systems: Pairing Trader Psychology with Technical Analysis

PSYCHOLOGICAL PROFILE OF A SHORT-TERM TRADER

Because short-term traders must make so many decisions during a typical business day, they are among the most likely of the trading personality types to benefit from systematic trading during the initial phase of their careers. More means more—more decisions, more opportunities, and most of all, more stress. Mechanical trading systems eliminate the seat-of-your-pants stress normally synonymous with short-term and especially with day trading techniques.

Because mechanical day traders (in contrast to their discretionary counterparts) have quantified entry, exit, risk and (in most cases) reward, it transforms their modus operandi from fast thinking, fast reactions, and faster burnout into a virtually limitless life expectancy.

Short-term systems can be attractive when compared to intermediate or long-term trading alternatives. Remember that the P:MD shown for the euro in Table 5.4 was 2.55. This compares quite favorably with the top-performing assets throughout Chapters 3 and 4. As stated earlier, the trade-off is that the performance of these shorter-term systems deteriorates dramatically when the trading vehicles analyzed exclude the assets highlighted throughout this chapter. We gain an attractive annualized rate of return and P:MD, but we lose the ability to diversify among negatively and/or uncorrelated asset classes.

A subtler disadvantage is the labor-intensive nature of these systems. Adherence to the system suggests that traders ...