Why do you need saving from yourself and why do I believe that mechanical trading systems are the best way to do this? Let’s explore this question…
…One of the biggest challenges that stops new traders from becoming successful and consistent is their own psychology! The more you trade and the more you consciously observe yourself, you will realize that we all have unconscious biases that impact the decisions we make. This is true no matter whether you trade stocks, futures or forex (FX).
Our everyday decisions in life are impacted by countless things including:
Most of these things are not conscious, and we don’t tend to think about them in day to day life that much…But trading is different:
If you make bad decisions in every day life as a result of issues like those listed above you may end up having a bad day. But if you make bad trading decisions as a result of any of these things you will lose money!
This is the beauty (and the curse) of trading. Our personal psychology impacts everything we do – Including our trading profits. So in a sense, we all have a problem that we need to resolve or at least address before we can become consistent, profitable traders.
I don’t mean to suggest that we all have psychological problems that need medical treatment, but, our psychology does impact our trading and most often it will be a negative impact.
Why? Because people are more often in a low state than in a peak state, and we all have baggage from the past which adversely impacts our trading.
In many cases the quickest way to reduce the impact of your psychology in trading is not to change your psychology, but to remove it from the equation all together! We do this by trading with mechanical trading systems that make the decisions for us.
Having a trading system make the decisions for us means we have less opportunity to stuff them up with our psychological issues!
Consistent profits come from consistent application of a trading system that has a positive expectancy. The easiest way to improve consistency in trading is to ensure your trading system makes all the decisions for you – Removing your personal judgment and biases from your trading.
This way, even if you are in a bad mood or feeling depressed or down on yourself it doesn’t impact your trading decisions because your system is making the decisions for you.
Of course you then have to implement the decisions that come out of your trading system, so that is a potential risk area. But at least you have a consistent decision making process to start with.
A mechanical trading system is simply a trading system that does not require discretion in order to make the trading decisions.
In a mechanical system all trading rules are fully codified and are created to cover all possible situations that you may encounter in the market. This way the trading decisions you need to make are predetermined by the rules of the system and not impacted by your psychology.
There are many advantages of mechanical trading systems:
The last point is particularly important because if you are beating yourself up it is hard to trade well, however, if you don't like something that 'the system did', then you can do some extra research and improve or change the system.
The major issue that prevents people trading profitably is their psychology, and mechanical trading systems go a long way towards addressing this issue.
If you are interested in learning more about different types of mechanical systems, check out our discussion of trading systems here. I also recommend people read 'Mechanical Trading Systems' by Richard Weissman which is reviewed here.
A good place to start is to look at trend trading systems because they are relatively easy to understand and implement. More information about trend trading systems is found here.
No matter what type of trading system you develop, you need a trading plan. Your trading plan captures all of your rules and explains how you will trade so that you do not have to make it up as you go – trading plans are explained in detail here. Your trading plan is the most important document you will ever write for your trading business so I suggest you learn how to write a good trading plan!
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