Mechanical trading systems are systems that generate trade signals for a trader to take.
They are called mechanical because a trader will take the trade regardless of what is happening in the markets.
In theory, this should eliminate all biases and emotions in your trading, because you are supposed to follow the rules of your system NO MATTER WHAT.
If you do a simple search in Google for “forex trading systems,” you’ll find many, many, many people out there who claim to have the “Holy Grail” system that you can purchase for “only” a few thousand dollars.
When developing your mechanical trading system, you want to achieve two very important goals:
- Your system should be able to identify trends as early as possible.
- Your system should be able to prevent you from getting whipsawed.
The hard part about those goals is that they contradict each other.
If you have a system whose primary goal is to catch trends early, then you will probably get faked out many times.
On the other hand, if you have a mechanical trading system that focuses on avoiding whipsaws, then you will be late on many trades and will also probably miss out on a lot of trades.
Your task, when developing your mechanical trading system, is to find a compromise between the two goals.
Find a way to identify trends early, but also find ways that will help you distinguish the fake signals from the real ones.
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