Updated: Jun 21
If you are reading this blog, you probably know that we at CDFX Trading, trade a mechanical trading strategy. A mechanical trading strategy is a strategy with black and white rules. This means there is no guesswork and everything is figured out before we enter a trade. In this article you are going to get a bit of insight into what a mechanical trading strategy is. We also go over one of our recent trades, so you can get an idea of our approach to the markets.
What is a mechanical trading strategy and what are the benefits?
As we said above, a mechanical trading strategy is a strategy with 100% clear rules. This means there is no guesswork, no feeling, no drawing random lines because something looks good, it’s all systematic. This way of trading allows you to prepare the best way possible and take emotion out of trading. A lot of people struggle with their emotions when trading. A mechanical trading strategy allows you to:
· Objectively trade
· Pre-determine everything
· Know your edge
Objectivity is very important in trading. Consistent results come from consistently executing an edge. The more objective your edge, the easier it is to execute it. Keep it simple, keep it mechanical.
Backtesting is an essential part of developing your own forex trading edge. During the 1-on-1 coaching we offer, we highly focus on backtesting. We help our clients with the entire process so they can build their own mechanical trading edge. The more mechanical a trading strategy is, the easier it is to backtest it. If there is guesswork, you need a simulator. With a 100% mechanical trading strategy, you don’t need one. You can just look back over the chart and log the trades, or just code it into an algorithm, because there is no discretion. This gives you a massive time advantage and can really cut down the time you spend learning to trade.
Pre-determining things is essential. You don’t want to be at the mercy of the markets, you want to be in control. You need to know exactly when you are going to take a trade, how you are going to trade it, how much you are going to risk on a trade and what the odds of winning the trade are. This brings massive confidence and leaves little room for error. The less mistakes you make, the more money you make. A mechanical trading strategy can help you with that.
Knowing your edge is what separates the winners from the losers. The people that make the big money, are the ones that know there edge inside out. Do you know your winrate, average R, expected drawdowns, periods you perform best? If not, you are not there yet. All these things are way easier to keep track of when you have a mechanical trading strategy.
As you can see, having a mechanical trading strategy can really accelerate your growth as a trader. This is why we at CDFX Trading focus on this type of trading.
The second part of this blog is going to be about a recent trade we took. We go exactly over the statistics, why we took it, how we traded it etc. So, take notes and take some time to read it.
If you want more examples, you might want to visit our Youtube Channel, as it’s filled with content and trade examples.
A recent trade we took
Alright, so as promised, we are going over a setup we recently took and we are going to tell you exactly what is mechanical about it. The basis of this strategy is 100% mechanical. However, we do use some discretion when trading it, to increase performance. The edge itself is mechanical, this is also what we teach our clients. We also teach them the discretionary concepts, it’s up to them if they want to be 100% mechanical, or add in some discretion to increase the performance.
The trade we took is a long in the GBPJPY. The upper green line is our target, the lower green line is our stoploss, the red line is our entry. As you can see from the picture below, there was a 71% chance of making 1.3R. As you can see, we know this BEFORE we enter a trade. This is based on the past 10 years of data. So basically, this exact setup has been tested over 10 years of data and 71% of the time, it hit our target, resulting in 1.3R. This is purely mechanical and an excellent edge.
Now, you might be wondering: how does he get those statistics? How is this mechanical? The mechanical trading strategy we use, is based on false breakouts and real breakouts. What you can see on the chart, is a breakout to the downside of the lower white line, followed by a clean break above the blue box. The idea behind this, is that the liquidity below the range has been triggered and absorbed by a bigger player, to accumulate a long position. After a clean breakout of the upside of the range, we have extra confirmation.
A quick note about liquidity. The liquidity below the white line, is sell side liquidity. This means that people that are long have their stoplosses here, below the range. A buyer’s stoploss is a sell order, because he sells his long order back to the market, at a lower price. This is what causes the loss.
The next thing you have here, are sellers that are selling a breakout to the downside. So in this area, you have two different groups of people, doing the same thing for different reasons: selling. Now, price should go lower as a lot of people are selling. However, this is not the case, price is aggressively moving up. This means the liquidity has been absorbed by a huge trader. Our mechanical trading strategy is built to join that huge player.
Now again, this all might seem very discretionary, and that’s because I’m not going over how the exact mechanical rules are applied. Those rules are key, otherwise this is just a discretionary strategy. We teach this to our clients and it would be unfair to give it away for free. Our clients exactly know how this setup works, they know the mechanical trading strategy. The bottom line is, we know exactly what the odds of a trading winning are, based on past performance, before we enter. This gives us massive confidence and a clear sense of edge.
So, to recap this entire trade: sellers have been trapped, liquidity has been absorbed, clean breakout above the range, statistics in our favor. This is how we like it, this is how we trade at CDFX Trading.
Want to know more about mechanical trading?
You now know what mechanical trading is, what the benefits of a mechanical trading strategy are and you know how we approach the markets. Does this way of trading interest you? Then you might be interested in our 1-on-1 coaching program, or in our strategy module. During the 1-on-1 coaching session, we teach you our mechanical trading strategy as well as some other concepts you can use to build your own trading strategy. We guide you in building your own profitable edge. We do that via Zoom calls. It’s very personal and gives you a massive edge over other traders.
If you have any questions about mechanical trading, or want to know more about CDFX Trading, feel free to contact us.