Anyone use a mechanical system?

[CardMinger]

Just wondering if anyone out there has tried using a mechanical trading system like the Turtle's or Aberration.

I would like some input from anyone who has tried such a method.

Thanks!

[Dan Mezick]

Anyone who is trading (as opposed to "set-it and forget-it" investing) and not using a mechnical system is simply gambling. Period.


Most traders have valid intuitive ideas and hunches and feelings about methods that will work. Often the intuitive ideas are actually OK. However, if these hunches are not reduced to a mechanized set of rules and procedures, the likelyhood of success with the method is very slim at best.

The essential problem is that markets are completely unstructured. Without self-imposed discipine and structure, the emotions will govern at the stress point.

This is 'the system' used by most 'traders'.

System definition is 90% of the clock time and 100% of the psychology essential to success. See

The Psychology of Full Immersion (ttp://forumserver.twoplustwo.com/showthreaded.php?Cat=&Number=1596815&page=0&view=c ollapsed&sb=5&o=14&fpart=1)

Reasons for Failure:

1. Weak psychology at the stress point. When your method delivers losses, adhering to rules are impossible if you dont have any. Because you have not done your complete homework, you can't take the heat. Then by default the emotions take over. This often results in selling at the absolute 3-month low, and literally defining the bottom. (Also known as trader's disease.)

2. Poor money management. Position size governs risk-of-ruin. Position size plus stop (defined risk) governs the practical psychology of each trade. The reality is that risking more than 2% per trade is a very bad idea, and more than 1% is probably excessive. A system consists of the methods of entry and exit, coupled with the money management rules.

3. Failure to Explore Personal Psychology. The reality is that you have to build your own method. You can buy one, but if you do not perform your own backtest and simulations, you are asking for trouble. See (1) above.

The best methods are hand-in-glove fits with your personal risk tolerance, schedule needs, and temperament. The chances of purchasing such a system are very scant.

One of the best authors on getting this right is Mark Douglas, author of "Trading in the Zone" and "The Disciplined Trader". He describes the unstructured nature of the market environment and the beliefs required to operate in that environment.

Chief among these beliefs is that anything can happen at any time, and that each moment is absolutely unique.

His books are extremely interesting.

He recommends using a stake of about 40 thousand dollars to practice mechanical trading, to train your mind. That is, after you have found a system with a) a likely max drawdown that you can handle, and b) a proven statistical edge.



Trading is a psychologically intense activity.

Given these contraints, it's little wonder that by many estimates, less than 1% of new traders are still active in it 10 years later.

[parttimepro]

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Reasons for Failure:


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You left out: Fundamentally unpredictable nature of the markets.

There is so much competition and so many people trying to beat the markets that any technique that actually works will very quickly be co-opted. Let's say you discover that stock X always goes up on Tuesday and down on Thursday (or always goes up after an inverted candlestick when it's below its 200-day moving average). If this is reliably true, others will catch on to it, and will buy on Monday and sell on Wednesday. Then it'll go up on Monday and down on Wednesday. So people will buy on Friday and sell on Tuesday, and so on, until the edge has disappeared.

There are opportunities for arbitrage, but trading firms have developed computer algorithms to identify and exploit these opportunities within seconds of their appearance.

Bottom line: there is no way a retail investor can consistently beat the market by trading.

[Dan Mezick]

You make a good point:

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You left out: Fundamentally unpredictable nature of the markets.

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I believe the markets provide sufficient opportunity for those who are willing to expend the considerable effort needed to identify and successfully exploit many small edges.

I won't disagree with you. I simply believe that there is substantial opportunity that lasts for some duration, and this opportunity is exploitable by the most disciplined and evolved participants.

The fact that human nature has not changed in thousands of years also contributes to significant and perennial opportunities. These opportunities are generated by crowd behavior, which is at it's core very primitive in nature, and not conscious per se.

"Normal human tendencies are traits that cause you to do poorly. Therefore to be successful as a trader you need to condition abnormal responses." - Mark Minervini, STOCK MARKET WIZARDS, page 186 (hardcover)

[CardMinger]

Dan,

Do you use a system that you developed or one you purchased?

Also are you mainly trading in stocks, futures or forex?

Thanks for the input so far...I have a lot of questions I hope you dont mind answering!

[CardMinger]

P.S.

I just got done reading "Trading in the Zone" and "Trend Following"

Those are the books that prompted my original question.

[Dan Mezick]

CardMinger,

Minimizing the list of variables greatly reduces the complexity of your first successful system construction project.

A good focus for your first effort may be the long side of equities, without the use of margin.

In poker terms, the long side of equites is a beatable, medium stakes 7-stud game. A prepared student may enter this game and do quite well.

Futures/forex markets are more complex games at higher stakes with more variables, more variance, and more professionals involved as a percentage of all participants.

Most participants speculating in those markets have already succeeded in far less complex trading environments.

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....'The fruits of your success will be in direct ratio to the honesty and sincerity of your own effort in keeping your own records, doing your own thinking, and reaching your own conclusions.' In other words, take 100 percent responsibiliy for your results." - Mark Minervini: Stock Market Wizards, page 176 (hardcover)

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