How does a mechanical trading approach adapt to a complex market? When should you adjust your rules as a trader? Is there a place for discretion in mechanical trading?
A lot of professional traders manage the complexity of the human psychological dimension of trading by removing their emotional judgment as much as possible from the system.
They know that they cannot completely eliminate their psychology from their trading, because they know some or all of the following issues will continually come to the surface of their attention for resolution. Each of these common occurrences are likely to generate considerable psychological pressure that must be addressed even with the best mechanical system around:
1. the purpose and objectives of their system
2. their appetite for risk
3. their capacity to manage the risks that they get (often more than their appetite)
4. their own response to the system’s performance
5. the response of their significant others to their system performance
6. a changing market that seems to have altered the availability and frequency of normal returns on capital (when you see other people making “easy money” and you are not, the temptation to intervene is large).
7. their response to client concerns and ideas if they are professional money managers.
8. a willingness to look for new opportunities and edges in changing markets
9. a need to feel personally connected to your trading
10. a need to feel that you are responsible for your winning results, through your own actions and decision-making
All of these issues will become an integral part of the psychological dimensions of your trading. Some are positive and some are negative, and some depend on the particular results your mechnical system is getting. Each one though puts pressure on you to change your rules to accommodate the emotion that it generates.
It takes a special kind of preparation and discipline to be able to trade a proven, back tested mechanical system strictly according to its rules. We are not naturally inclined to follow these kinds of systems which leads to so may decent systems being cast aside unfairly. Be prepared as a trader to manage these pressures. Notice I didn’t say resist, because resistance creates its own problems later down the road. It is necessary to anticipate and then manage these emotional responses for the long term health of your system, your self and your bottom line.