Mechanical Trading Strategies: A Critical Evaluation
Mechanical trading strategies are systematic approaches that execute every trade strictly according to predefined rules, regardless of market conditions—whether trending or ranging. The core principle behind these strategies is consistency and the belief that profitability can still be achieved by taking every valid trade.
One of the primary arguments in favor of mechanical trading systems is their ability to maintain a favorable risk-to-reward ratio (RRR), typically ranging from 1:2, 1:2.5, to even 1:3 or higher. In theory, this means that a trader only needs to win 33% of the time with a 1:2 RRR to break even or be profitable.
But is this assumption truly valid?
After analyzing the concept, several potential issues emerged:
1. Fees and Slippage
In my opinion, fees are the most significant problem with this approach. On most trading platforms or brokerages, the taker fee ranges between 0.4% and 0.7% of the trade amount. Now consider this: does your RRR still hold at 1:2 after accounting for fees?
Let’s break it down:
Assume a trade has a risk of 0.5% and a target profit of 1%, which ideally gives a 1:2 RRR. However, in reality:
Average taker fee: 0.05% per side → 0.1% total
Average slippage: 0.01%–0.03%
So:
On a losing trade, you lose:
0.5% (risk) + 0.1% (fees) + 0.02% (avg. slippage) = 0.62%
On a winning trade, you gain:
1% (profit) - 0.1% (fees) = 0.9%
This adjusts the effective RRR to:
0.9 / 0.62 ≈ 1.45
Therefore, the practical RRR becomes approximately 1:1.45 instead of the theoretical 1:2. At this point, a 33% win rate would actually result in a loss.
Mathematically, to preserve a true 1:2 RRR after accounting for fees and slippage, the formula becomes:
(Profit - Fees) / (Risk + Fees) = 2,
or more precisely: (y - 0.1) / (x + 0.1) = 2
plotting this on graphing calculator may help to visualize
This means either the target must be increased, or the stop-loss must be tighter—both of which can negatively impact the win rate.
2. Low Win Rate
Mechanical systems that trade every signal—especially in ranging or choppy markets—often have low win rates. Even with good RRR, when adjusted for fees and slippage, the edge may disappear unless the system is highly optimized.
I have used XAUUSD or the Gold as a referrance.And Liquidated supertrend(Aggresive mode) indicator as an example.
I have executed all the recent signals on paper and got a winrate of around 25%
So, clearly this strategy is not actually a working one
3. High Time Commitment
Since mechanical strategies take every signal, they often require frequent monitoring and constant engagement with the market. This high level of activity can be mentally exhausting and impractical for many traders, especially if the system is not automated.
Conclusion:
While mechanical trading strategies offer discipline and eliminate emotional decision-making, their theoretical advantages—like high RRR—can be significantly diminished by real-world factors such as fees and slippage. Without proper adjustments or automation, they may not yield the expected profitability and could potentially lead to long-term losses.
And a clear statement: "There is no mechanical trading strategy that can actually make you money over the time"
Note: This theoretical paper and its statements of mine have been grammatically revised and refined with the assistance of ChatGPT.
Asif Hassan Risan
4 June,2025
Mechanical trading strategies are systematic approaches that execute every trade strictly according to predefined rules, regardless of market conditions—whether trending or ranging. The core principle behind these strategies is consistency and the belief that profitability can still be achieved by taking every valid trade.
One of the primary arguments in favor of mechanical trading systems is their ability to maintain a favorable risk-to-reward ratio (RRR), typically ranging from 1:2, 1:2.5, to even 1:3 or higher. In theory, this means that a trader only needs to win 33% of the time with a 1:2 RRR to break even or be profitable.
But is this assumption truly valid?
After analyzing the concept, several potential issues emerged:
1. Fees and Slippage
In my opinion, fees are the most significant problem with this approach. On most trading platforms or brokerages, the taker fee ranges between 0.4% and 0.7% of the trade amount. Now consider this: does your RRR still hold at 1:2 after accounting for fees?
Let’s break it down:
Assume a trade has a risk of 0.5% and a target profit of 1%, which ideally gives a 1:2 RRR. However, in reality:
Average taker fee: 0.05% per side → 0.1% total
Average slippage: 0.01%–0.03%
So:
On a losing trade, you lose:
0.5% (risk) + 0.1% (fees) + 0.02% (avg. slippage) = 0.62%
On a winning trade, you gain:
1% (profit) - 0.1% (fees) = 0.9%
This adjusts the effective RRR to:
0.9 / 0.62 ≈ 1.45
Therefore, the practical RRR becomes approximately 1:1.45 instead of the theoretical 1:2. At this point, a 33% win rate would actually result in a loss.
Mathematically, to preserve a true 1:2 RRR after accounting for fees and slippage, the formula becomes:
(Profit - Fees) / (Risk + Fees) = 2,
or more precisely: (y - 0.1) / (x + 0.1) = 2
plotting this on graphing calculator may help to visualize
This means either the target must be increased, or the stop-loss must be tighter—both of which can negatively impact the win rate.
2. Low Win Rate
Mechanical systems that trade every signal—especially in ranging or choppy markets—often have low win rates. Even with good RRR, when adjusted for fees and slippage, the edge may disappear unless the system is highly optimized.
I have used XAUUSD or the Gold as a referrance.And Liquidated supertrend(Aggresive mode) indicator as an example.
I have executed all the recent signals on paper and got a winrate of around 25%
So, clearly this strategy is not actually a working one
3. High Time Commitment
Since mechanical strategies take every signal, they often require frequent monitoring and constant engagement with the market. This high level of activity can be mentally exhausting and impractical for many traders, especially if the system is not automated.
Conclusion:
While mechanical trading strategies offer discipline and eliminate emotional decision-making, their theoretical advantages—like high RRR—can be significantly diminished by real-world factors such as fees and slippage. Without proper adjustments or automation, they may not yield the expected profitability and could potentially lead to long-term losses.
And a clear statement: "There is no mechanical trading strategy that can actually make you money over the time"
Note: This theoretical paper and its statements of mine have been grammatically revised and refined with the assistance of ChatGPT.
Asif Hassan Risan
4 June,2025
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.