Mechanical traders are usually relative beginners in the Forex markets and their focus is on systems and not on time. After they have spent time on back testing strategies with historical data, they pick a particular strategy which meets the requirements and then focus on execution and implementation which enables them to choose entry and exit levels without involving their emotions or being stressed by the decisions. These systems, also known as Forex robots or expert assistants, can trade with a minimum of human intervention once the settings have been finalized and the trader has the further luxury of additional back testing so that he or she can continue to tweak the settings. The main danger of these systems is that the trader can be induced into a false sense of security because there is no discretionary trading. This becomes particularly deadly when market conditions change drastically and increase volatility and the settings on automated systems have to be quickly reset in order to adjust to the changed market conditions. Otherwise, the trader is looking at losses on the trading account.
The main benefits of mechanical trading are:
The lack of human intervention-the trader has no need to monitor the markets continuously once there is confidence that the system works. The system can execute multiple trades scrupulously without having to worry about changed market conditions.
Flexible trading techniques-since automated trading systems are not limited by timeframes or other limitations, trading strategies can be devised around any currency pair which can be traded on the brokers trading platform .
Time saving-the mechanized nature of the system and the elimination of human intervention provides the trader with plenty of time in which to pursue other activities while Forex trading more or less takes care of itself.
What every mechanical trader should learn
Defining strategy in detail-the first requirement in developing a mechanized trading strategy is for the trader to describe the strategy in as much detail as possible. This would include defining the entry into a trade including the market conditions, the setup and confirmation as well as the final confirmation that will trigger the placement of an order. The exit must also be described in detail including the stop loss and the market conditions that will trigger the exit. One of the benefits of this exercise is that the trader will be able to test every facet of the strategy before putting it into operation on the
mechanized trading system.
Adequate back testing-a trader would have to be out of his mind to start using a mechanized trading system without a thorough back test using historical data. Normally, manual back testing can be a laborious and complicated process but many brokers now offer facilities on their trading platforms together with the necessary historical data. Since the trading strategy has been described in detail, using the brokers platform should be a relatively simple process though the testing itself may be prolonged.
Understanding the system-one of the main advantages of extensive back testing is that the trader learns the details of how the system performs and what kind of expectations he should have. This understanding enables much better management of risk by letting the trader judge how much risk to take on any particular trade. This benefit alone suggests that every trader should be developing and running at least one mechanized system even though it may not be used for primary trading.
Consistency of execution-one of the most difficult aspects of executing a trading strategy mechanized or otherwise is to ensure that it is done consistently. The trader is often forced to control his emotions which is easier said than done. One of the biggest points in favor of mechanized trading systems is that the rules will be enforced without exception thus separating emotions completely from investment judgment.
Characteristics of a good mechanized system
A prerequisite for profitable trading is that any trading system that you use should provide you with an advantage. In other words, the system should create favorable circumstances to tip the balance in your favor. Some of the ways in which this can be achieved by identifying and using the trend, by using support and resistance levels effectively and by using market momentum. Most good mechanized trading systems tend to follow the trend. The next important factor is the timeframe and it can be difficult to produce reliable forecasts from short trading timeframes. The best mechanized trading systems almost always use a long-term timeframe. This will provide plenty of time for your advantage to work in your favor one avoiding the random nature and the increased transaction cost of entering and exiting trades frequently. For instance, the transaction cost of a trade that covers several weeks is often minuscule. Contrary to the belief of many traders, even experienced traders find it difficult to identify the absolute tops and bottoms of any market. In fact, it is not uncommon to find the market moving against you during the early part of any trade which is why a fairly large stop loss is almost always required. A feature of the best automated trading systems is that they can accept large stop losses.
In summary, it would be fair to say that good automated trading systems have a long-term outlook and use trend following and use the time frame to let your advantages operate in your favor. They do not seek to identify tops and bottoms and are therefore in a position to accept large stop losses. Most important, they will only trade if market conditions are conducive to success.