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Mechanical Trading Systems

InvestorEducation / Trading Systems Nov 18, 2009 - 02:32 AM GMT

By: Andrew_Abraham

InvestorEducation

If you look in any commodity or forex publication you will see advertisements for mechanical trading systems. This is an area in which commodity traders as well as forex traders seek to find their holy grail. Well in reality this will not happen with any mechanical trading system on the market. However mechanical trading systems have some very distinct advantages.


When a commodity trader uses a systematic mechanical trading approach they greatly increase their odds of success if they can truly follow the signals. Mechanical trading systems remove ones opinions & ego from the daily decision process that must be made. As well mechanical trading systems should reduce the emotional attachments and fears of losing money.

Really what is great about these mechanical trading systems..they automatically generate buy and sell signals based on preprogrammed algorithims. The signals do not take into account if Bernake is speaking or if there was a report in Bloomberg that Jim Rogers thinks corn is under valued. The fact is the mechanical system runs like a robot. The problem comes into play with the commodity trader does not following the signals. I have seen countless times commodity traders start to question their systems at the first sign of a draw down. The reason for this is they have not tested their mechanical trading system or they do not understand how exactly the system works. Another common cause of concern …is that I have seen repeatedly …is the commodity trader or the investor in a commodity trading advisor has not truly accepted the risks inherent in commodity trading.
To be more clear….

I have heard all too many times ..Yes I can go through a 20% draw down. Yes..I know it is part of trading. HOWEVER at a 10% draw down the commodity trader or investor in the commodity trading advisor becomes very uncomfortable.It is very clear to me …they really did not accept the risk. This is one of the keys of successful investing.

As much as well all like consistent and reasonable returns with reasonable risk, the fact is the markets are volatile. The fact is your greatest draw down is always ahead of you. This is the reason one needs to fully understand how their mechanical trading system works or what exactly is the methodology and risk management of the commodity trading advisor they would consider investing with.

Mechanical trading systems are a start… but not for the professional commodity trading advisor. They need the platform offered by Mechanica or trading blox. I will discuss these products in another of my posts.

Andrew Abraham
www.myinvestorsplace.com

Andrew Abraham has been in the financial arena since 1990. He is a commodity trading ddvisor and co manager of a Commodity Pool. Since 1993 Andrew has been a proponent of quantitative mechanical trading programs. Andrew's major concern is not only total return on investment but rather the amount of risk that one would have to tolerate in order to achieve returns He focuses on developing quant models that encompass strict risk adherence and correlation. He has been a speaker at conferences as well as an author of numerous articles. Andrew has spent years researching ideas that have the potential to outperform indices as well as maintain fewer draw downs.

Visit Angus Jackson Partners (http://www.angusjacksonpartners.com) Contact: A.Abraham@AngusJackson.com (mailto:A.Abraham@AngusJackson.com)

© 2009 Copyright Andrew Abraham - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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