Traders following mechanical systems can see situations that may affect mechanically based signals. Here's how to include technical signals outside your basic trading signal.
What makes it more difficult still is that often the intuitive
hunch not to follow a signal proves to be correct, therefore
transforming what was originally intended to be a mechanical
trading program into what can best be described as a
discretionary trading program based on technical indicators.
While this approach, depending on the trader’s talent and
experience, may actually lead to excellent results, it will lack
the primary advantages of a well-designed and executed
mechanical system, advantages such as:
• Predictability of the risk-return profile
• Adaptability to a team approach
• Execution independent from the presence of one specific
• Reduced risk that performance will be affected by the
absence of the key trader
• Trading philosophy and rules that can be explicitly
disclosed to the investor/client if so desired
• Easy-to-disclose improvements and modifications made
to the system.
The real challenge in trading
mechanical systems is not in the
design and development phase
but in the execution. Execution
discipline is often difficult to
achieve because of the extra information
that the trader has (or
thinks he or she has) that is not
reflected in the system logic.