V.16:11 (508-512): Mechanical Trading System and the Art of . . . by Marcello Cattaneo Adorno

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 trader

• 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.