Analysis of the core drawbacks of mechanical trading systems

In order to overcome the weaknesses of human nature and eliminate the negative effects of emotions in actual trading, a considerable number of traders have developed various mechanical trading systems, expecting to achieve the goal of deterministic profit through machine trading. The author has personally developed and operated such trading systems and found that such trading systems have fatal flaws, which make it impossible for mechanical trading systems to achieve the goal of deterministic profit. First, mechanical trading systems are theoretically established

The so-called systematic trading refers to an interrelated trading rule system formed by organically combining risk control technology and trading technology under the guidance of a certain investment philosophy. A trading system is an organic combination of fund management, risk control, psychological control and market statistical analysis. Adopting a systematic trading method makes trading decision-making activities systematic and consistent, which is fundamental to achieving sustainable and stable profits.

The theoretical basis of systematic trading:

1. Price fluctuations are not completely random, and their non-random components (trends) exist and can be traced and identified.

2. Trading systems exist that achieve positive expectations at a given level of risk.

3. Systematic trading can overcome human weaknesses and achieve sustainable and stable profitability at a given risk/return level.

Characteristics of Systematic Trading:

1. Risk/return can be expected: After more than ten years of trading data testing, various risk control indicators and parameters have been tested, such as expected profit margins, maximum losses, maximum number of consecutive losses, risk/return ratios, etc., which can be predicted in advance, allowing risks to be controlled and returns to be expected.

2. Homeopathic trading: The system uses trend tracking technology to dynamically track market trends and continuously adjust the position direction to align with the current market direction.

3. Objectivity: All the rules and parameters of the trading system are fully mechanized, and trading signals are automatically sent out by the system, completely eliminating the subjective judgment of traders, thus effectively addressing the negative impact of traders' emotions on trading.

Therefore, mechanical trading systems can be said to be flawless in theory. If they can put theory into practice, they can undoubtedly achieve certain profit goals. The problem is that no mechanical trading system can turn theory into practice 100%.

Second, the fatal flaws of the mechanical trading system

The author believes that in order to achieve the certainty of investment results, it is necessary to achieve the certainty of investment philosophy, the certainty of trading rules, and the certainty of risk management, namely:

For a mechanical trading system, among the above three links, there are two fatal flaws that lead to uncertain investment results, namely:

1. A mechanical trading system lacks a certain investment philosophy

Mechanical trading system's buying and selling signals are based on the signals indicated by the combination of some trading indicators. Through continuous trial and error, we try to find the trend in the market. There is no investment concept at all. This search has huge costs. It itself has huge uncertainty. Some trading systems die on the road to finding truth before making profits. For example, many investors are usingTickmillWhen waiting for a platform, you will also encounter similar problems. The system cannot fully replace an effective trading concept.

2. Mechanical trading systems have deterministic trading rules in theory, but they cannot be achieved in practice

The application of trading systems in actual combat often encounters this phenomenon: in the simulation stage, various parameters and indicators are very satisfactory, but as soon as they enter the actual combat, they start to lose money, and the problem lies in the theoretical reality (Slippage).

Sending buy and sell signals based on any indicator or combination of indicators has a time lag, that is, the requirement to evaluate the signal at the end of a specific time, and then issue a trade order based on the signal. There is an inevitable error between the transaction price and the market price at the moment the signal is sent. This error is the theoretical reality difference (Slippage), which makes trading systems designed based on decades of statistics useless.

It is precisely because of the existence of errors that the complex machine of the mechanical trading system has fatal flaws, which may bring huge losses to investors at any time. Even on platforms such as Tickmill, traders still need to be vigilant of these inherent problems.