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FOREX ExpertAdvisor Mechanical Trading Systems: What Every Trader Should Know
from: David Lyder
- "information and ideas about FOREX trading systems"
FOREX ExpertAdvisor Mechanical Trading Systems: What Every
Trader Should Know
Most successful FOREX traders use a handful of diverse trading
strategies. Which strategy used may depend on the particular
currency pair, recent price action or patterns, market
volatility and/or a myriad of other variables.
The simple fact that a trader needs an arsenal of strategies
suggests the need for at least one mechanical trading system.
In the recent past, the obstacles to develop, test and run a
mechanical trading system were significant. Expensive, complex
software platforms, coupled with costly real-time data feeds
required a significant investment of time and money. In
addition, the quantity and quality of brokers offering such
services was limited.
Today, this is no longer the case. There are several free
automated trading platforms available from a number of different
brokers. One popular platform is MetaTrader 3.0, which uses the
MQL II language to develop what MetaTrader calls an Expert
Advisor. (In addition to MetaTrader 3.0, there is a newer
version, MetaTrader 4.0. MetaTrader 3.0 is generally easier to
learn by a non-programmer and is a better choice for a trader
creating their first mechanical trading system).
Since this platform is free, and most introducing brokers offer
demo accounts, it is an excellent opportunity for a FOREX trader
to evaluate mechanical trading without incurring any upfront
costs.
But what are the benefits of developing and running one's own
mechanical trading system? Should a trader - especially one who
is a not a programmer - spend their valuable time learning this
skill?
The answer is an overwhelming "yes". There are at least four
reasons developing a mechanical trading system is worthy of a
traders effort .
Reason #1: The trader's strategy must be fully described
The first step in developing a mechanical trading system is to
describe its behavior. The trader is forced to fully articulate
the strategy of their trading system. This includes both the
trade entry and exit.
The trade entry must be described in detail, including concrete
definitions of:the proper market conditions for entry, the trade
setup or confirmation, the final confirmation or trigger.
The trade exit must be fully defined as well. The stop loss and
limit as well as the conditions for exiting must be fully
described.
For many traders, articulating their trading strategy proves to
be both challenging and enlightening. The personal growth a
trader experiences through this exercise alone justifies
developing a mechanical trading system.
Reason #2: Mandatory backtesting
No trader in her right mind would unleash a mechanical trading
system without first thoroughly backtesting the system. Paper
trading or backtesting by hand is no doubt a tedious and error
prone process. Fortunately, most brokers offering free trading
system platforms also offer the ability to back test - along
with sufficient historical data to perform the testing.
Since the trader has already fully described and translated
their trading system into a working program, backtesting is as
simple as pushing a button. Of course, a great deal of testing
may be required, and the results may defy understanding! But the
fact remains, executing the back test is a relatively easy task.
Reason #3: Increased discipline
An outstanding byproduct of backtesting is that it readies the
trader for the actual performance of the system. That is,
backtesting calibrates the traders expectations of their trading
system.
The main benefit of possessing an accurate expectation of one's
system is an increased level of discipline. When a trader
conducts numerous back tests, they begin to understand the
randomness of any one particular trade. This understanding
prevents a trader from assuming too much risk on any particular
trade - regardless of the quality of the trade setup. While
testing, the trader has seen too many "perfect trade setups"
that resulted in losing trades. Again, this benefit alone
justifies developing and running at least one mechanical trading
system.
Reason #4: Consistent execution
Consistently executing a trading strategy is the single most
difficult task a trader faces. The ability to accurately
interpret market behavior through a smoke-screen of emotions -
fear, greed, anger, elation - is a talent very few traders
actually possess. An often cited benefit of the mechanical
trading system is its ability to execute trades according to its
rules, with no variation.
The actions required to develop, test and execute a mechanical
trading system are consistent with the behavior shared by most
successful traders. If done correctly, the results of these
actions reward the trader for the effort; this positive
experience reinforces the "good" behavior and gradually builds
and strengthens the framework successful traders rely on to
remain successful.
Visit us at
www.iExpertAdvisor.com
About the author:
Co-founder of iExpertAdvisor, LLC, Author of "Automatic Alpha:
How to Build a Winning FOREX Trading System", Author of "The
iExpertAdvisor iBulletin"
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