Mechanical Trading Systems: Pairing Trader Psychology with Technical Analysis

BENEFITS OF MECHANICAL TRADING SYSTEMS

This section acts both as a comprehensive review of those benefits enjoyed by those employing mechanical trading systems and as an opportunity to examine other benefits not previously addressed.

The greatest benefit of mechanical trading systems is their ability to reprogram traders away from destructive types of behavior in favor of successful trading habits. Although this reprogramming process is typically a long and painstaking one, for those who have a single-minded desire to succeed (see Chapter 11), it is a powerful tool in tempering emotionalism as well as fostering discipline, patience, and adherence to principles of sound price risk management.

Another benefit enjoyed by those employing mechanical trading systems is quantification of risk and reward in general, along with the ability to quantify the risk/reward for an entire portfolio of assets. Without the quantification of risk and reward, performance forecasting is problematic. Moreover, although prudent price risk management is not dependent on utilization of a mechanical trading system per se, the ability to quickly compare historical results of a system to current performance and to determine whether these deviations are within normal tolerances or suggestive of a paradigm shift in market dynamics is invaluable to both traders and risk managers.

As stated earlier, because the mechanical trading systems showcased throughout this book are based on mathematical technical indicators, ...