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2012issue C0880-81

Mechanical system design with strategy, signals, and size

A mechanical trading system is one algorithm that coordinates a directional strategy, a signal system, and a position-size rule, including the choice not to trade. Name the market-state strategy first, keep only compatible signals, and set a risk-reward size bound that can be revised when volatility or the trend assessment changes.

  • Specify the mechanical trading system as one algorithm that coordinates a directional strategy, a signal system, and a position-size rule.
  • Market-state lists are finite: 27 combinations from three readings and three horizons, 36 from six market types and two horizons, or eight from trend versus no-trend across three horizons.
  • Ignore entry and exit signals that conflict with the chosen strategy. That compatible-signal filter makes standing aside a rule.
  • Set the share, contract, or lot count from a risk-reward ratio before entry, and revise unit count or the traded time horizon when volatility or the trend situation changes.
Entries in this reading3 entries
Current trackVolatility position sizing57 readingsRisk-reward ratio78 readingsMechanical trading system322 readings

One procedure, three modules

A trading system can be specified as one algorithm that coordinates three subsystems: a directional strategy, a signal module, and a position-size rule. In this archive usage, that single procedure is a mechanical trading system. It includes the choice not to trade.

The strategy is a standing assessment of expected regime. It may be trend or no-trend, or a volatility-qualified bull, bear, or neutral state, read across one or more time horizons. The signal system is the rule set that marks entries and exits. Position size is the share, contract, or lot count that follows from the size rule.

Strategy combinations at a given moment

Crossing three market-condition readings with three time horizons produces 27 strategy combinations at a given moment.

Treating each of bull, neutral, and bear as ordinary or volatile yields six market types. Pairing those types with two time horizons produces 36 strategies.

Reducing market state to trend versus no-trend across three time horizons produces eight strategic combinations. Two states and two time components produce four short-horizon scenarios.

Signals that agree with the strategy

Signal modules can be grouped as level and channel breakouts, volatility or pattern events, overbought/oversold and line-cross indicator events, and trailing trend-following rules.

Entry and exit signals that conflict with the chosen directional strategy are ignored rather than executed. That requirement is the compatible-signal filter.

A bounded size that can be revised

Position size is a count of shares, contracts, or lots set from a risk-reward relationship rather than from the latest price change. It can be recalculated when the assessed trend situation shifts.

The risk-reward ratio is a pre-entry bound. Maximum acceptable loss and risk per unit can fix a per-trade size bound before entry, independently of the strategy, signal module, or chart pattern in use.

Volatility position sizing adjusts the unit count, or the traded time horizon, when assessed volatility or the trend situation changes so exposure stays bounded. When volatility is a concern, the traded time horizon or the indicator settings can be changed instead of rewriting the signal module.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
14 of 25 in the Volatility position sizing track
20126-7 pp.Next on Volatility position sizingPrecommit size before a one-day policy shockA policy-shock-session can return major US indexes to prices last observed five sessions earlier, so precommitted-size should be set from account equity, volatility, and stop distance before entry.
All readings on this track · 25 readings
  1. 1988Two-sided optimization for volatility-scaled breakout rules
  2. 1990Weekly range volatility as a tactical regime filter
  3. 1993Heat first, then contract count on a weekly close-only breakout
  4. 1994Shared sigma for trend entries, retests and stops
  5. 1995The promised result as one testable trading procedure
  6. 2001Convert a survival ceiling into a volatility filter
  7. 2002Bound the next loss before the bear trade
  8. 2004Dollar-loss tolerance versus percent-of-equity stops
  9. 2004Bounded risk before entry: stop, size, and leverage
  10. 2006Position sizing as the pre-trade bound on loss and exposure
  11. 2006A trend-regime matrix for volatility position sizing
  12. 2011A premarket range checklist for opening-hour breakouts
  13. 2011Stop-defined share count on a clustered intraday short
  14. 2012Mechanical system design with strategy, signals, and size
  15. 2012Precommit size before a one-day policy shock
  16. 2013R-multiple expectancy, drawdown, and volatility position sizing
  17. 2014Constructing trend-aware slope-divergence rules
  18. 2014Pretrade drawdown fences and volatility sizing
  19. 2015Convert pip value into cash before a forex lot size is chosen
  20. 2016Expectancy as an execution skill rather than a backtest score
  21. 2017Volatility parity equalizes the ticket; implied volatility is a regime dial
  22. 2018Wide-range breakout rules from chart volatility
  23. 2019A structure-based stop, then resize or pass
  24. 2020A cash rule that zeros a trend book on extreme volatility and a short losing window
  25. 2025R-multiples before you size up
By fieldSystem design203 readingsBy year2012165 readings
All 57 readings tagged Volatility position sizing
Also on Volatility position sizing5 readings
2002Size from stop distance to keep dollar risk even2006Constructing peak-excursion filters for stops and size2011Stop-defined share count on a clustered intraday short2015Convert pip value into cash before a forex lot size is chosen2019A structure-based stop, then resize or pass