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Components Of A Mechanical Trading System
Mechanical trading systems are systems that generate buy and sell signals according to a specific set of rules that have been programmed in the system. It replicates a trader's trading plan and can also send buy and sell signals directly to exchanges. The components of a mechanical trading system include:
Entry:
These are specific rules or conditions that must occur before a buy order is placed in the market. A good entry must not repaint and must have an exit. An example of an entry condition could be -> buy when 50MA crosses over 200MA; sell when 50MA crosses over 200MA.
Entry Stop:
An entry stop is the same as a stop-loss. This rule contains logic that stops a system out when the market moves against the entry signal it generates, the best place to place an entry stop is outside the normal fluctuation of price movement and one of the best indicators to do this is the ATR indicator. Entry stop is a useful method for managing risk.
In-Trade Stop:
There are several types of In-Trade stop raging from break-even to trailing take profit... In-Trade stop such as trailing take profit are rules within a system that helps us squeeze a little extra profit from the market.
Filters:
Filters are used to prevent false signals and make sure that your entries align with a favorable market condition. A good filter should adapt to the changing market condition and increase profit.
Hard Exits:
Hard exits are rules that tell a mechanical trading system where or when to get out of a position and make money off the table. Exit can be considered as taking profit level.
Pyramiding:
Pyramiding is a kind of entry strategy for stacking up an order when a system triggers a buy or sell condition more than once. Pyramiding is good for capitalizing on strong trends. It can also increase a systems risk because it creates room for more positions to be opened in the market.
Risk Management:
This can also be considered as position sizing. Essentially, this is how your system spends your money and it is the most important part of any trading system, your system should not risk more than 1-2% of your equity on each trade.
Circuit Breaker:
Circuit breakers are temporary measures that halt trading to prevent your equity from dipping down to zero during market crises.
Alerts:
The most interesting thing about a mechanical trading system is that it can be automated by setting up alerts that send buy and sell signals to exchanges.
Portfolio Composition:
Building a profitable mechanical trading system requires simplicity and diversification which is achieved by building a portfolio of uncorrelated assets. Your portfolio should consist of both trending assets and mean-reverting assets.
- Entries
- Entry Stops
- In-Trade Stop
- Filters
- Hard Exits
- Pyramiding
- Risk Management
- Circuit Breaker
- Alerts
Entry:
These are specific rules or conditions that must occur before a buy order is placed in the market. A good entry must not repaint and must have an exit. An example of an entry condition could be -> buy when 50MA crosses over 200MA; sell when 50MA crosses over 200MA.
Entry Stop:
An entry stop is the same as a stop-loss. This rule contains logic that stops a system out when the market moves against the entry signal it generates, the best place to place an entry stop is outside the normal fluctuation of price movement and one of the best indicators to do this is the ATR indicator. Entry stop is a useful method for managing risk.
In-Trade Stop:
There are several types of In-Trade stop raging from break-even to trailing take profit... In-Trade stop such as trailing take profit are rules within a system that helps us squeeze a little extra profit from the market.
Filters:
Filters are used to prevent false signals and make sure that your entries align with a favorable market condition. A good filter should adapt to the changing market condition and increase profit.
Hard Exits:
Hard exits are rules that tell a mechanical trading system where or when to get out of a position and make money off the table. Exit can be considered as taking profit level.
Pyramiding:
Pyramiding is a kind of entry strategy for stacking up an order when a system triggers a buy or sell condition more than once. Pyramiding is good for capitalizing on strong trends. It can also increase a systems risk because it creates room for more positions to be opened in the market.
Risk Management:
This can also be considered as position sizing. Essentially, this is how your system spends your money and it is the most important part of any trading system, your system should not risk more than 1-2% of your equity on each trade.
Circuit Breaker:
Circuit breakers are temporary measures that halt trading to prevent your equity from dipping down to zero during market crises.
Alerts:
The most interesting thing about a mechanical trading system is that it can be automated by setting up alerts that send buy and sell signals to exchanges.
Portfolio Composition:
Building a profitable mechanical trading system requires simplicity and diversification which is achieved by building a portfolio of uncorrelated assets. Your portfolio should consist of both trending assets and mean-reverting assets.
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