Fatal flaws in mechanical trading systems

In order to overcome the weakness of human nature and eliminate the negative effects of emotions in actual trading, there are quite a few traders who develop various mechanical trading systems and expect to achieve deterministic profit targets through machine trading. The author personally developed and practiced such trading systems and found that such trading systems have fatal flaws that have made it impossible for mechanical trading systems to achieve deterministic profitability.

First, the mechanical trading system is theoretically established.

The so-called systemized transaction refers to the interrelated transaction rule system formed by organically combining risk control technology and transaction technology under the guidance of certain investment concepts. The trading system is an organic combination of fund management, risk control, psychological control and market statistics analysis. The use of systematic trading methods makes the trading decision-making activities systematic and consistent, which is fundamental to achieving sustained and stable profitability.
The theoretical basis of systematic trading:

1. Price fluctuations are not completely random, and their non-random parts (trends) are present and can be tracked and identified.

2. A trading system that achieves a positive expectation at a given risk level exists.

3. Systematic trading can overcome human weakness and achieve sustained and stable profit under the established risk/return level.

The characteristics of systematic trading:

1. Risk/return can be expected: After more than ten years of transaction data testing, the trading system has tested various risk control indicators and parameters, such as expected profit margin, maximum loss that may be suffered, maximum number of consecutive losses, risk/return ratio, etc. It can be predicted in advance so that the risk can be controlled and the benefits can be expected;

2. Homeopathic trading: The system adopts trend tracking technology to dynamically track market trends and continuously adjust the direction of positions to make it consistent with the current market direction;


3. Objectivity: All rules and parameters of the trading system are completely mechanized, and the trading signals are automatically issued by the system, completely eliminating the subjective judgment of the trader, thus effectively solving the negative influence of the trader's emotion on the transaction;

It can be seen that the mechanical trading system can be said to be impeccable in theory. If the theory can be put into practice 100%, it will undoubtedly achieve the deterministic profit target. The problem is that no mechanical trading system can convert the theory into practice 100%.

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