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What are mechanical trading strategies & what are the benefits of them?

Updated: Dec 14, 2021

Mechanical trading strategies, you have probably heard of them. We at CDFX Trading use mechanical trading strategies to trade the spot FX market, but we also use mechanical trading in trading metals. Mechanical trading systems are black and white systems that make it easier to trade the markets. But what are the benefits of these systems and how do you create a mechanical trading system for yourself? That’s what you will learn from reading this article.

The definition of a mechanical trading system

Mechanical in my opinion means a 100% rule based way of trading to such an extent that the strategy is programmable and can be run by an expert advisor, that’s mechanical trading. That’s what we do at CDFX Trading. However, lately we have been implementing a bit more discretion in our own trading in order to increase performance. More about that later on.

So, a mechanical trading strategy is a system with clear rules. It’s a statement that says you have to do a certain thing if a certain thing happens. There is no guesswork or anything. You just follow the rules and trade.

But why choose a mechanical trading system? The benefits of such systems are:

· More clarity

· Less room for error

· Easier to define an edge

These are some of the massive benefits you can experience when you choose for a mechanical trading system. First of all, you get more clarity. Why? Because you know exactly when you need to be in the markets and when you need to be on the sidelines. You wait for your rules to line up. When they don’t line up, you don’t trade. It’s that simple. Because of this, you won’t overtrade. Overtrading is a massive problem in trading and using a mechanical system can help you combat this problem.

Furthermore, if you choose a mechanical trading system, you will experience more profitable trading because you make less errors. Why? Because again, you know what you are looking for. You just need to follow tested rules and that’s it. If you build a habit of following these rules, it’s way easier to trade. You don’t have to guess and ask yourself if you drew that trendline right. You only follow your tested rules that provide edge, and that’s it.

Edge is, as you know, vital to your success as a trader. Edge development is something we speak a lot about at CDFX Trading. An edge means the odds are in your favor over the long run and you have an expectancy above zero. How you get that positive expectancy, that’s up to you. If you use a discretionary method, you can get an edge, if you use an expert advisor, you can get an edge. We prefer mechanical trading because it makes it way easier to test, gather statistics and see if there is any edge in what you are doing. That’s why we teach our clients how to build a mechanical trading strategy. We teach them concepts we use. It’s up to them if they use it, want to test it and build their own system that fits with their goals and personality.

If you want to know how to determine if your trading strategy has an edge, click here. On this website you fill in your statistics and you can see if your trading strategy has an edge. Preferably, the expectancy is well above 0, because you need to take into account slippage, spreads, commissions, swaps & room for error. Most beginning traders don’t even know what expectancy is and think you should always trade with a 3:1 RR ratio. This is bullshit. It’s all about expectancy. An expectancy above zero means you will make money in the long run. If that’s with a 1:1 that’s totally fine. Keep in mind that the statistics have to fit with your personality and they have to be able to be replicated in the real markets. If that’s the case, you have an edge.

In short, using a mechanical trading system can give you a big advantage in terms of getting an edge and executing that edge in real time.

Different types of mechanical trading strategies

There are different types of mechanical trading strategies. You can build mechanical trading strategies based on price action, indicators or other factors. The point is, it needs to be black and white, rule based and programmable. Other than that, it’s up to you. Here at CDFX Trading we use a price action pattern that gives us a mechanical edge. We use that pattern to trade into on the lower timeframes, which increases our average R. There are also a lot of traders out there that define a certain pattern on a weekly timeframe, gather statistics and form a bias on the weekly timeframe. When the pattern occurs, they have a bullish or bearish bias for the entire week and trade into that bias, using statistics.