This post is about the difference between discretionary and mechanical trading, and why mechanically joined our major preferred. The ability to back test your system is one of the advantages. In psychological terms is mechanically joined a better option, since you do not need to take a new decision. In addition to mechanical systems are automated.
Discretionary trading is acting on insight. Discretionary traders think they know which way the market is going and then choose their positions in the market. Of course they do not equal each time, but successful discretionary traders can achieve exceptional results. George Soros is such a trader. In 1992, he saw through the political game in Europe and went short the British pound. He was quite a bit of money and invest together with some other hedge funds he received the UK to its knees. On 16 September of that year had to make known the British finance minister that the British pound is no longer part of the European exchange rate mechanism. The currency was strong decline and Soros earned more than one billion U.S. $.
Of course this is not for everyone, because you have a lot of experience and a good nose in order to redeem. Great opportunities We accept that we can not predict the market and use another way to get our profits within: mechanical trading.
Mechanical systems on average earn money because they have an edge.
Mechanical trading systems is acting with an edge have either an advantage in the market .. This means that these systems average money. For example, you trade with a stop loss / take profit ratio of one to two, then your system has an edge when you win on average more than a third of your trades. Naturally produces a mechanical system no neat row of trades in which two losers always followed by a winner. There may well be five, ten or maybe more losers consecutively occur, but follows it often also be hosting a few winners.
The fine mechanical trading systems is that you can test with historical trading data (back-testing). Them very well So you get a picture of the equity curve and you know in what percentages winning and losing trades you should expect. The latter is very important to get you through difficult times with losses to help around. If you know in advance that your system example, sometimes eight consecutive losing trades, it is much easier to accept if it actually happens. So you can avoid getting into your system lose your confidence and will deviate from the rules, or even your entire system topples overboard.
Mechanical systems can automatically act for you.
Another great benefit of mechanical trading systems is that you can be acted upon. Them for you automatically We act include the hourly chart, but we really do not sit behind the screen every hour to see if we get a signal. Our trading platform is looking for us every hour and takes a position as our system provider. Another great benefit of automation is that we go directly on the hour in the market. We therefore lose no time and pips because we must first calculate how big our position should be, and where the stop loss and profit target to come.
With a simple system as an EMA crossover with good stop losses can fine mechanical and automated trading.
Also among the hedge funds are mechanical traders. The largest is Renaissance Technologies founded by Jim Simons. Together with a team of 275 employees, he manages over 15 billion U.S. $. They do a very secret about their methods but their results are great. For mechanical trading, however, you do not need large sums of money or enormously complicated systems to act. Even with a simple system as an EMA crossover with good stop losses can fine mechanical and automated trading.
In our next blog you can read more about the ‘edge’ of a system and get some basic statistics that you can use in assessing and developing your system properly.
TIP: You can test your simple mechanical trading systems, click here on this platform.