Human psychology is one of the biggest reasons for failure when trading the financial markets. Humans are prone to panic, fear, and greed.

These emotional responses cloud our judgment and hinder our decision-making abilities. With a mechanical trading system, this emotional-based decision-making problem is solved. These automated trading systems also have an advantage over manual trading in terms of the efficiency of their order execution. Computers will always have a faster reaction time and can enter and exit trades more efficiently than humans.

These increased efficiencies could translate into larger profits and smaller losses over large periods. Whilst these automated systems have several very significant advantages, they are not without their failings. Since these systems are based on technology, they are subject to the same limitations as any other type of technology. A power cut, loss of internet connection, or technical failing could prevent the software from operating correctly.

These limitations mean that traders will need to remain on-hand to monitor the software and ensure everything runs smoothly. NOTE: You can get the best free charts and broker for these strategies here.

As Forex software becomes more advanced, automated trading will become increasingly common, with many traders already utilizing mechanical forex trading software. Whilst there are several mechanical forex trading strategies, for this post, we will focus on one particular strategy that adopts a trend following approach in the Forex market. Below you will find the two signals and six applicable rules for this strategy.

As you can see, the strategy above is straightforward and operates with only two signals and just over a handful of rules to guide it. You will notice that the rules only allow for the system to have a one-directional trade open at any point. The rules also allow for the stop-loss on these trades to be continuously updated, essentially acting as a trailing stop-loss but without the need for you to redefine any additional parameters.

Thanks to the strict rules this strategy adopts, the strategy requires minimal modifications whilst remaining robust enough to operate profitably over time.

Mechanical trading systems are not exclusive to any specific asset. They can be used in forex, cryptocurrencies , and even stocks. Since these trading systems are designed to exclude emotions from the trading experience, you can certainly see their appeal. The first step will be to identify what timeframe you wish to trade in. Some traders prefer the minute chart while others prefer hourly.

This is a personal decision, and you will need to make this decision based on your own trading preferences.

Moving averages are a prevalent indicator for traders who wait for a crossover between two moving averages to signal an entry position. Whatever indicator you choose to use, make sure you are not only operating with one indicator. Your system must be reliant on information from at least two indicators. Popular indicators that can be used in conjunction with moving averages are the RSI or MACD.

With your timeframes and indicators ready, the next step is to identify your risk tolerance. Mechanical trading systems are not infallible, and your capital is still at risk when using these systems.

Ensure that you set your stop-loss orders to account for the amount of capital you are comfortable with losing. There are several methodologies and theories available to help you set these entry and exit points. Below we will look at what these rules might look like in practice when entering or exiting a trade. The above two rules are just examples, and you should change them to suit your own specific indicators and trading styles. There are a host of different providers from whom you can download and access automated trading software.

Some of these providers will naturally be better than others, but there are five things you should look out for when determining which one to use.

Based on the above 5 criteria for selecting automated trading software, MetaTrader 4 appears to offer the best overall service. Since action is taken only when certain evidence is registered, you can spend a minute or two per [market] in the evening checking up on whether action-taking evidence is apparent, and then in one telephone call in the morning place or change any orders in accord with what is indicated.

Are you comfortable with the concept of right and wrong? The price you analyze everyday is the truth. Price does not lie. The price is always right. Markets are also the same because of price.

All markets are most directly measured by their individual price movements. What do cotton, crude oil, Cisco, SUN, GE, US Dollar, Australian Dollar, soybeans, wheat, Microsoft, JDS Uniphase, EMC and Oracle all have in common? Moreover, you also know nothing about fiber optic networking a specialty of JDS Uniphase.

Oracle and databases? Does it matter that the fundamentals of cotton, JDSU and ORCL are all different? What if you just analyze their market prices? Trend following does not require an understanding of the market fundamentals. Take the price data and apply your rules. If your trading is pure trend following, all markets are the same in terms of price analysis. William F. Some years ago, in a land called Indicia, revolution led to the overthrow of a socialist regime and the restoration of a system of private property.

Former government enterprises were reformed as corporations, which then issued stocks and bonds. These securities were given to a central agency, which offered them for sale to individuals, pension funds, and the like all armed with newly printed money. Almost immediately a group of money managers came forth to assist these investors. Recalling the words of a venerated elder, uttered before the previous revolution Invest in Corporate Indicia , they invited clients to give them money, with which they would buy a cross-section of all the newly issued securities.

Investors considered this a reasonable idea, and soon everyone held a piece of Corporate lndicia. Before long the money managers became bored because there was little for them to do. Soon they fell into the habit of gathering at a beachfront casino where they passed the time playing roulette, craps, and similar games, for low stakes, with their own money.

After a while, the owner of the casino suggested a new idea. There the members could place bets with one another about the fortunes of various corporations, industries, the level of the Gross National Product, foreign trade, etc.

The offer was immediately accepted, and soon the money managers were betting eagerly with one another. At the end of each week, some found that they had won money for their clients, while others found that they had lost.

But the losses always exceeded the gains, for a certain amount was deducted from each bet to cover the costs of the elegant surroundings in which the gambling took place. Before long a group of professors from Indicia U. Why pay people to gamble with your money? Why not just hold your own piece of Corporate Indicia? they said. This argument seemed sensible to some of the investors, and they raised the issue with their money managers.

The wave of puritan reform some had predicted failed to materialize, and gambling remained legal. Many managers continued to make their daily pilgrimage to the casino. But they exercised more restraint than before, placed smaller bets, and generally behaved in a manner consonant with their responsibilities. And everyone but the casino owner lived happily ever after. When most people first start trading they often start small. As they get better at it, they trade more. They might start with one contract and then move to ten contracts.

As time progresses, they reach a certain comfort level with their trading, but are still afraid to take risks beyond that level. As a result, they never trade at levels of contracts or 1,, so they never experience large profits.

There is a better way in which the object is to try to keep things in constant leverage terms. In other words, you trade the same as your equity increases. By using a trend following approach to money management, you are never afraid of getting big. You are prepared, so you know what you will do in advance as your account grows. This is a key to the trend following money management. Risk taking is essential to successful trading, as long as it is calculated risk.

When you take a risk it is useful to have a mechanical trading system for several reasons: You increase your diversification , reduce your work load and make your trading life easier.

Mechanical trading systems enable you to take a risk without getting personally involved. Other components of your life will always impact your thinking generally and your trading decisions specifically, unless you rely on a mechanical system.

Trend following trading is predicated on the fact that human beings are not psychologically equipped to interact profitably with markets. When money is involved, psychological pulls interfere with objectivity.

As a result, human beings who have money on the line tend to take their losses too late and their profits too soon. The problem of taking profits too soon particularly affects traders. They often feel a strong desire to close out a profitable position when it starts to move against them.

Mechanical systems overcome these psychological and emotional reactions. Bear in mind that consecutive runs of losses are not merely possible, but will ultimately occur over time, given enough trades.

However, when they do happen, this is the point when it is crucial to have a strong money management plan to keep you in the game. Trend followers know the trick of letting their profits run is key to trading. Once you learn that to maximize your profits you must be willing to give up some part of your accumulated profits, you are on your way to sustained success.

Refusing to give up a part of that accumulated income due to fear is their big mistake. Trend followers understand the nature of the market. See the mistake of quickly taking a profit just because you might not like volatility? Do you think great traders have been successful by taking profits?

Or have they compounded their profits? Letting profits run is tough psychologically. It feels risky. But, once you understand that in trying to protect every penny of your profit, you actually prevent yourself from making a bigger profit, you have learned an important reason why trend followers are so successful. Trend following traders use a philosophy of trading that adapts to different markets and different market conditions.

What do we mean? During a high volatility period, for example, a good trend following trading system will dictate that you trade fewer contracts or shares of a given market.

During periods of lower volatility, trend following dictates that you trade more contracts or shares. Trading the same number of contracts or shares no matter the volatility simply decreases your odds of success.

Who wants to do that? A main reason for always measuring volatility is for the psychological benefit. If you have too much volatility and your trade size is not correctly decided in any one position it attracts your attention.

Your focus shifts to one particular position and you can lose sight of the big picture. Measuring volatility and then adjusting your risk exposure for any given trade keeps you psychologically balanced. If one particular market has an explosion of volatility you can trust your rules to decrease your trading size to reflect the new level of uncertainty.

Sounds simple enough? Perhaps it is, but most people ignore the wisdom. Have you ever received a stock tip from a friend, CNBC, or your broker that also included a volatility measure?

Have you ever heard a market commentator tell you how much of a stock to actually buy or sell within the context of what current volatility is?

Everyone who is trading, but not for a living, has probably asked themselves this question. When people ask us, we respond: Well, what is a living? Some traders may have a losing year — it happens to the best. The real crux of the matter amounts to what is a living for you, and whether you are able to follow a system to make your goals happen. The answer ultimately depends on your self-discipline and whether you have that needed deep desire to win at all costs.

Famed trader, Jim Rodgers, gives this perspective:. Even then, of course, it may be all in vain. You may make a single mistake that wipes out all the work. It may ruin the sweet, lovable self you were at seventeen. Such goals take complete dedication. How Much Time is Needed? Not much if you follow a Trend Following system. Trading signals can be generated manually via a simple PC spreadsheet in a few minutes per day.

Just keep careful records and a trading log. You can also automate trading signals with products as discussed here. Orders can be placed before the market opens and do not need hourly monitoring. If the markets are not moving there is nothing to do! What do they do? They manage their trades in 10 to 60 minutes per day. Richard Donchian offered great wisdom decades ago:.

If you trade on a definite trend following loss limiting-method, you can [trade] without taking a great deal of time from your regular business day.

Since action is taken only when certain evidence is registered, you can spend a minute or two per [market] in the evening checking up on whether action-taking evidence is apparent, and then in one telephone call in the morning place or change any orders in accord with what is indicated.

Are you comfortable with the concept of right and wrong? The price you analyze everyday is the truth. Price does not lie.

The price is always right. Markets are also the same because of price. All markets are most directly measured by their individual price movements. What do cotton, crude oil, Cisco, SUN, GE, US Dollar, Australian Dollar, soybeans, wheat, Microsoft, JDS Uniphase, EMC and Oracle all have in common?

Moreover, you also know nothing about fiber optic networking a specialty of JDS Uniphase. Oracle and databases? Does it matter that the fundamentals of cotton, JDSU and ORCL are all different? What if you just analyze their market prices? Trend following does not require an understanding of the market fundamentals. Take the price data and apply your rules. If your trading is pure trend following, all markets are the same in terms of price analysis.

William F. Some years ago, in a land called Indicia, revolution led to the overthrow of a socialist regime and the restoration of a system of private property. Former government enterprises were reformed as corporations, which then issued stocks and bonds. These securities were given to a central agency, which offered them for sale to individuals, pension funds, and the like all armed with newly printed money.

Almost immediately a group of money managers came forth to assist these investors. Recalling the words of a venerated elder, uttered before the previous revolution Invest in Corporate Indicia , they invited clients to give them money, with which they would buy a cross-section of all the newly issued securities. Investors considered this a reasonable idea, and soon everyone held a piece of Corporate lndicia. Before long the money managers became bored because there was little for them to do.

Soon they fell into the habit of gathering at a beachfront casino where they passed the time playing roulette, craps, and similar games, for low stakes, with their own money. After a while, the owner of the casino suggested a new idea. There the members could place bets with one another about the fortunes of various corporations, industries, the level of the Gross National Product, foreign trade, etc.

The offer was immediately accepted, and soon the money managers were betting eagerly with one another. At the end of each week, some found that they had won money for their clients, while others found that they had lost. But the losses always exceeded the gains, for a certain amount was deducted from each bet to cover the costs of the elegant surroundings in which the gambling took place.

Before long a group of professors from Indicia U. Why pay people to gamble with your money? Why not just hold your own piece of Corporate Indicia?

they said. This argument seemed sensible to some of the investors, and they raised the issue with their money managers.

The wave of puritan reform some had predicted failed to materialize, and gambling remained legal. Many managers continued to make their daily pilgrimage to the casino. But they exercised more restraint than before, placed smaller bets, and generally behaved in a manner consonant with their responsibilities.

And everyone but the casino owner lived happily ever after. When most people first start trading they often start small. As they get better at it, they trade more. They might start with one contract and then move to ten contracts. As time progresses, they reach a certain comfort level with their trading, but are still afraid to take risks beyond that level. As a result, they never trade at levels of contracts or 1,, so they never experience large profits.

There is a better way in which the object is to try to keep things in constant leverage terms. In other words, you trade the same as your equity increases. By using a trend following approach to money management, you are never afraid of getting big.

You are prepared, so you know what you will do in advance as your account grows. This is a key to the trend following money management. Risk taking is essential to successful trading, as long as it is calculated risk. When you take a risk it is useful to have a mechanical trading system for several reasons: You increase your diversification , reduce your work load and make your trading life easier.

Mechanical trading systems enable you to take a risk without getting personally involved. Other components of your life will always impact your thinking generally and your trading decisions specifically, unless you rely on a mechanical system. Trend following trading is predicated on the fact that human beings are not psychologically equipped to interact profitably with markets.

When money is involved, psychological pulls interfere with objectivity. As a result, human beings who have money on the line tend to take their losses too late and their profits too soon. The problem of taking profits too soon particularly affects traders. They often feel a strong desire to close out a profitable position when it starts to move against them.

Mechanical systems overcome these psychological and emotional reactions. Bear in mind that consecutive runs of losses are not merely possible, but will ultimately occur over time, given enough trades. However, when they do happen, this is the point when it is crucial to have a strong money management plan to keep you in the game. Trend followers know the trick of letting their profits run is key to trading.

Once you learn that to maximize your profits you must be willing to give up some part of your accumulated profits, you are on your way to sustained success. Refusing to give up a part of that accumulated income due to fear is their big mistake.

Trend followers understand the nature of the market. See the mistake of quickly taking a profit just because you might not like volatility? Do you think great traders have been successful by taking profits? Or have they compounded their profits? Letting profits run is tough psychologically. It feels risky. But, once you understand that in trying to protect every penny of your profit, you actually prevent yourself from making a bigger profit, you have learned an important reason why trend followers are so successful.

Trend following traders use a philosophy of trading that adapts to different markets and different market conditions. What do we mean? During a high volatility period, for example, a good trend following trading system will dictate that you trade fewer contracts or shares of a given market.

During periods of lower volatility, trend following dictates that you trade more contracts or shares. Trading the same number of contracts or shares no matter the volatility simply decreases your odds of success. Who wants to do that? A main reason for always measuring volatility is for the psychological benefit. If you have too much volatility and your trade size is not correctly decided in any one position it attracts your attention.

Trend following trading is not very complicated in terms of rules. If you do not specify a bar interval then the moving average will be calculated in the chart interval. Disadvantages Of Mechanical Forex Trading Systems. Mechanical systems overcome these psychological and emotional reactions. What if you just analyze their market prices?

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