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.
Again, it’s up to you, but make sure it’s 100% mechanical.
Our mechanical trading system
If you follow our Telegram channel or Youtube Channel, you know how we trade. Our mechanical trading strategy is based around a pattern that indicates liquidity absorption. What does this mean? It means that the pattern is based on areas of liquidity. Then we wait and see what happens once liquidity gets triggered. If there is aggressive absorption and we get our pattern, we know the statistics are in our favor and we can join the markets. This is the one and only time we join the markets. If the pattern doesn’t happen, but the market looks good, we don’t trade.
The pattern is a price action pattern, so no indicators. It’s 100% mechanical and it’s programmable. Which we have recently done. This makes it easier to trade and to backtest.
Are you interested in our trading strategy? Then you might want to buy our strategy module. This module goes over the components of our strategy and show you how you can build your own mechanical trading strategy.
Mechanical trading has massive benefits, but discretionary trading also has its benefits. For example, if you have been trading a mechanical trading system for a while, you develop a certain feeling for that pattern. You know that once something happens, it’s more likely to make money. This is where you can add your discretion to maximize profits. Keep in mind, this can only be done if you have a mechanical trading system with edge and if you have been trading it for a long time. Otherwise, you are just breaking your rules and you will probably lose more money.
We believe every trader should start as mechanical as possible to define an edge and develop the discipline to follow a simple mechanical trading system. When a trader has finished that stage, then it’s time to add in some discretion. A combination of mechanical trading and discretionary trading makes sure you get the best of both worlds. This way you can make the most profits, learn, improve and develop your trading career.
If you have been trading a mechanical trading system for a while and you have tested a lot of things to improve its performance, then it might be time to add a bit of discretion. You can do this by still developing rules. You then go on a simulator and trade these rules with discretion, to see how these rules perform. Does it significantly increase edge? Then you might think about implementing it in your own trading.
Fix your trading
Recently we have launched a new service on our website, called Fix Your Trading. Fix your trading is for traders that already have been trading for a while but that are still losing money. It’s not a bullshit course, it’s a 1-on-1 Zoom call that takes around 1 hour. During that call we are going to look at the problems you face and we will make a plan so you can fix your problems and get better at trading. It’s just a one-time small fee. You will learn a lot about your trading and have a clear path that you can follow to improve. This can cut down the time you spend in your learning phase.
A mechanical trading system or a mechanical trading strategy is a strategy that can be fully programmed. It’s 100% rule based and it’s in our opinion the way trading should be done. When you are experienced and use discretion, you can become the best trader you can be. So, start developing your mechanical edge, gather statistics and calculate your expectancy. After that, you can add discretion.
Did you like this blog? Then please leave a comment below. Also, if you have any questions, feel free to contact us, we will be there to help you.