Investment & Financial Articles
Title: Beginner's Saga: How to Use Mechanical Trading
Author: www.e-mastertrade.com
Article:
Trading beginner has plenty of market illusions. Beginner has a
somewhat experience, common sense and strong belief in victory.
He also read books, instructions, tips and tricks, examined
handful of trading programs and believe them in one wrong thing:
that anyone could win. Authors of such books are often silent
about traders' proverb: 'Market is not creates money. Money is
only distributed between players'. One player changes another
and only few leaders do make profit.
Beginner is hoping that good analysis and tons of stock
knowledge will serve him a good service. He is stay tuned for
searching for effective price movement methods for a long, long
time. Day by day he's spending time and money. Those
beginners who hold the line gets it - there is no common sense
Order at the market. The market behaves itself quite like what
you think it will; but all the rest is the Pure Chaos. Well, our
beginner cannot make effective prognosis. And now he's maturing
and he's not trying to fight the analysis' limitations. He
follows the plan and he enters the market only when it is time
for follow the plan.
MECHANICAL AND NON-MECHANICAL APPROACHES TO MARKET ANALYSIS
There are two types of approaches on trading strategy selection
- either mechanical or subjective. If trader's got a mechanical
one he doesn't need to make investment decisions - everything
makes everything. MTS is always knows what to do and more
important - when to do. The trader is only to follow the market,
system signals and to make orders to his brokers.
At the other hand if trader doesn't have clear trading system he
is to make subjective decisions. These decisions are impulsive
and often made by impression. Often it is not based on analysis
- but greed and fear. Human nature is not free from errors and
pros are differ from beginners by strict emotional control.
Practice shows that absolute majority of successful traders is
using mechanical approach to the trading. Beginners and 'traders
just for trade' are inclined to subjective analysis.
Well, what does it mean - 'mechanical trading system'? We're
choosing the market, configure system to it, choosing formulas
based on historical data, entry points, exit points for profit
and loss positions. System is running and there is no need to
sit day by day before the monitor hoping to cry: "All got it!"
Practice shows that hour by hour 'monitor duty' is good only for
starting stages of learning the market and stage of choosing
optimal strategy. Once started, system will work autonomously
and trader may rest or do something else without worrying about
anything.
RISK MANAGEMENT WHEN USING MTS
Using of mechanical trading principles contains certain risks.
Important requirement is not to adjust system to current market
situation. The longer test period means the more sceneries of
price movement does it knows and as result - means more stable
trading. Another important requirement - do not wait only profit
signals. There are no such a systems. Profit system may generate
and loss signals. Pros self-discipline is just like that: to
follow his tactics when loss signal comes.
There is only on criterion of good system: optimal risk/yield
parameter. If MTS does generate both signals it have to provide
statistical advantage - to generate more profit transactions
than loss ones. From statistical point of view it means that
after the end of trade interval the amount of money exceeds
initial value. MTS has statistical advantage if:
(average profit transaction) * (percentage of wins) > (average
unprofitable transaction) * (percentage of losses)
But this expression is not accurate enough. It doesn't take in
the count expenses - commission, overheads, etc. If expenses are
high profitable MTS may become unprofitable one. If transaction
commission is $50 than 40 transactions will cost the trader
$2000. Such expenses will shrink $20000 account by 10%. Let's
correct our expression:
((average profit transaction) * (percentage of wins) -
(expenses)) > (average unprofitable transaction) * (percentage
of losses)
One of criterions for measuring MTS effectiveness is selection
of optimal amount of transactions called reliable pattern.
Choice of the reliable pattern is a quite subjective thing. Some
traders require only 10 transactions and others require no less
than 1000. Well, last ones are too conservative but
mathematically right. But if we are allow these price movements
are mostly random then we may say that many pattern transactions
are quite random at win or loss. That's why we must have many
transactions to reduce influence of random factors on total
statistics.
At other hand many experienced traders are contending that 30-35
transactions are enough; for seasoned traders 10 are enough. It
is all about the trading is the area where art and experience
meet the science. We may say only one thing - the more checks do
mean better results. Real pros understand that there is no
perfect mechanical system ideally suitable for assets of
financial market. Art of pros is the choice of the configurable
system - which will be called the best after training.
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About the author:
NEWBIE'S ILLUSIONS AND PROFESSIONAL APPROACH
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