Buying a Mechanical Trading System
In recent years, mechanical trading systems, using technical analysis to predict trend movements have become popular as a way of locking into from trends.
With computers cheaper than ever before and the spread of the internet anyone can afford a mechanical system and use it to trade for long term profits.
The system you pick is critical
While there are many trading systems to choose from the number of good ones is relatively small. With a little research and homework however, you will be able to find the systems that make money, suit your trading personality and your tolerance.
Let's look at finding a trading system that's right for you.
1. Make Money from the Longer Term Trends
All markets trend: Currencies shares, commodities bonds futures and commodities tend to have long term trends that last for many months or even years and these trends are the ones to focus on.
So look for a trading system that seeks to identify these and trade them for profit
A good trading system can enable traders to lock into, and make profits from these longer-term trends.
Another benefit of a long term trading system is that slippage and commission costs are less. With cheaper transaction costs you get to keep more of the profits.
2. Liquidity improve overall profitability
Look for trading systems that trade liquid markets as this will enable profits to be locked in quickly and just as importantly cut losses quickly.
Foe example currencies are extremely liquid but some commodity markets such as pork bellies and palladium are not.
3. Trading Systems - Keeping emotions out
There has been plenty of material written about the advantages of trading systems, and keeping emotions out of trading, which are one of the main reasons traders lose
The books below provides great reading for anyone thinking of using a trading system.
You should read books by any of the authors below:
Edwin Lefeurve, Jake Bernstein, Larry Williams, Ken Roberts, Van Tharpe and Jack Shwager.
Shwager's books "Market Wizards" and "The New Market Wizards" interview some of the most successful traders of all time and how they use systems and is truly an inspiring read for all traders.
4. Build your own or buy off the shelf
Today you can build your own trading system or buy one from a vendor.
If you want to buy your own software packages such as Tradestation, Supercharts, Omni trader, and many more, allow any trader to back test systems, using a variety of technical indicators that include:
· Bollinger bands
· Moving averages
And many more
The trading system picked can then be analyised, to see how it would have performed in the markets with commissions and slippage factored in to the results giving an accurate view of how it might perform.
Traders, who don't want to develop a currency trading system, can buy systems off the shelf from vendors.
How do you choose Trading System from a vendor?
If you are buying a trading system, there are several things to consider before parting with your hard earned cash:
1. What Type of trader are you?
Are you interested in being a day trader, or a trader looking for longer-term trends?
You need to pick a system that you're comfortable with and this is mostly down to your trading personality.
Some traders like the excitement of day trading others prefer a longer-term approach.
2. What input do you want on the system?
Do you want to have any override on the trading system, or do you want it to be totally mechanical?
3. Do you want to diversify?
Do you want to trade one specific area or be diversified across several markets?
Using a trading system that trades just one area can be more profitable but keep in mind, the converse is true, i.e losses and drawdowns can be bigger.
4. Understand the logic
When choosing a trading system you need to have the discipline to trade it as it is and follow the system through losing periods.
To do this you should know the logic the trading system is based upon.
If you understand the system and its logic, you will have confidence and be more likely to follow it with discipline - in contrast to one where the logic is not revealed and as soon as losses occur doubts set in.
5. What is your trading objective?
You need to consider the following: What are the average profits you can expect in relation to drawdowns?
All trading systems will have periods of drawdown and losses.
Generally the larger the profits the bigger the drawdowns tend to be - so pick a system that reflects your investment aims and risk tolerance.
6. Do your homework on the vendor
When you are buying a trading system, check out the system seller's experience, track record, customer support, - and whether they have a real-time track record, or a hypothetical one.
A real time track records means the trading system has performed in the market and made money, i.e it's proven.
Trading systems that simply rely on hypothetical track records mean they have been back tested, - and with the benefit of hindsight anyone can make money.
While hypothetical track records should be treated with caution, you can find out a lot about whether the system is likely to make money, by knowing the logic the system is based on.
The most important point to consider when looking at a hypothetical track record is to pick one that is not optimized.
Look for a trading system that trades ALL markets with the same rules.
One of the biggest mistakes traders make is buying systems that have "unique" rules to trade different markets.
What this basically means is that the vendor cannot get the system to work on the market, so its "curve fitted" i.e. the rules fit the data in hindsight.
If the logic is soundly based it will work on all markets.
7. Never consider a "black box" system
When considering never use a "black box" system where you have no idea how to system works. You will not know the logic and this will hit confidence and discipline when you trade.
In conclusion, you can make your own trading system, or you can buy one from a vendor - when choosing one from a vendor make sure you do your homework and keep in mind if looks too good to be true, it probably is!
Mechanical trading systems can, and do make money, and the effort you put into finding the right system that suits your trading personality will be time well spent.
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