I guess this is more of a poll: How many people use purely mechanical systems? I would like to use one but I am weary of taking all of the trades. I always think that I can beat the market. Thanks
If you're not going to take all the trades, then don;t try to trade a system. One way to give yourself the confidence to trade it is to do a huge amount of backtesting and then go through each trade setup, so you can experience what you would have been feeling then. Personally, I think the best approach is to use systematic setups or filters, then use some discretion to enter and manage the position. One problem with this is that many setups will occur just before important fundamental events, such as Fed meetings or jobs numbers. The system doesn't care, but you might.
Its very hard to take all the trades. But that is what you have to do. Take Oddball for example, I've customized the basic oddball system with stops and profit objectives and other enhancements and the thing has been highly successfull over the last couple years. I watch monitor all the trades in realtime, but I haven't been able to trade this system. I think if I build up a higher equity base in the next few years I will trade it. I do trade a mechanical system I created for T-Bonds. No overnights and I trade small size at the moment for this system, so I don't have a problem taking all of the trades. The secret is to base the trades on some market internals/dynamics and not on the actual price chart of the security you are trading. Oddball uses the Rate of Change of NYSE Advancing Issues, for example. Stuff like TICK, NYSE volumes of adv/decl etc... IMHO Also, now you can automate your system to take out your emotions in second guesses the trades.
For successful system trading, you must: 1 - Have a good system with plenty of historical testing over various market conditions (up, down, sideways, volatile, chop) using realistic commission/slippage (eg. $50/r-t ES contract) 2 - Be adequately funded ... 3 x historical closed trade drawdown 3- Take every trade ... if you don't you will miss the big winner. 4 - Constantly monitor performance ... watch drawdown/profits vs. historical std dev 5 - Have an exit strategy ... when are you going to stop trading the system 6 - Diversification ... two to many low correlated systems. 7 - Realistic expectations ... what do you expect from system As a bold experiment, I have funded a small account with Man Financial and am currently trading two custom systems (one swing, one daytrade) for the ES via automation. I will be posting my monthly statements as an experiment show what one can expect. Attached is a spreadsheet with the equity curves of each system and the combined of both. I started trading the systems live in 9/30 ... first 4 days were great ...up +2500 plus, currently down -$200. The combined sysetms have a historical drawdown of around $4k (highest equity peak to lowest equity valley closed trades), so I'm prepared for this. The hardest thing to get used to is the swing in equity ... I've taken the mindset that this is a business. I've bought a business with capital and that capital is not mine until I sell the business (stop trading the systems).