A mechanical trading system looks for market indicators, and buys or sells accordingly, at times without human intervention. This is why it has caused some controversy. After all, leaving your computer to make money on its own while you are sound asleep sounds too good to be true. However, using automated software for your trading activities is legit, and it comes with several benefits. Following are some of them.
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1. You profit because of your efforts. – You add value in the sense that you set the system up in an informed and intelligent way. You have to code, perform back and forward testing, and monitor your trading program.
2. You assume trading risk. –How great the risk you will be taking depends on how well you have designed your system. You profit or you lose accordingly.
3. A well-designed system performs a constructive market role. – It helps iron out volatility, and it makes the prices more consistent and nearer the true values.
4. An automated system has a fundamental value applicable to its designer. – Mechanical trading system critics say that automation eliminates the human factor in trading. In reality, the reverse is true because the development process helps the developer. For one, you cannot program objective and clear orders if do not thoroughly think out your strategy.
Some people find it difficult to articulate the particular strategy they have in mind - when asked about it. When setting up a mechanical trading system, however, you have no choice but to describe the strategy in terms of trading orders or numbers. This results to a clearer understanding of the process.
5. Back and forward testing are easy. – All you have to do is apply the same orders to various market data. You can then have a reasonable basis for your expectations. This is contrast to subjective trading where greed can come into the picture, which makes back testing a personal strategy difficult.
6. Orders are followed and executed without emotions. – The system sticks to what it is programmed to do, no matter what. In a manual system, even the most jaded traders may tend to deviate from their tested methods when faced with mounting losses or skyrocketing profits that, in most cases, produce undesired results. The system does not care about your bottom line and will not stop unless you make it stop. It totally eliminates emotions in trading activities.
To sum everything up, an automated trading system is more consistent and disciplined. One disadvantage is that it does not absorb and react to new insights. You have to do that by making adjustments and continuously improving your system – even if it has been successful so far. This is the only way to guarantee success over the long term.
Reference: Mr. Zahir from MTrading contributed in this Post