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2020issue C0827

Mechanical systems still need emotion rules

Archive notes record that fully rule-based order placement does not remove emotion while capital is at risk. TradersWeek editorial view: write signal acceptance, strategy selection, and shutdown as first-class rules, because those leftover human choices still decide whether a coded system is actually traded.

  • Fully rule-based order placement does not remove emotion from trading whenever capital is at risk.
  • Traders commonly skip or overrule generated signals, and choosing which coded strategies to run can be more stressful than allowing a chosen strategy to execute.
  • Weak live results plus personal attachment to a self-built procedure can delay turning that procedure off.
  • Editorial view: treat signal acceptance, strategy selection, and the shutdown rule as the same class of rule as entries and exits.
Entries in this reading2 entries
Current trackMechanical trading system322 readingsTrading psychology process376 readings

Coded entries do not finish the system

A mechanical-trading-system is a fully specified mapping from rule inputs, market state, and execution constraints to entry, exit, and abstention signals over the system's holding period. Fully rule-based order placement does not remove emotion from trading whenever capital is at risk.

A simulation environment is practice trading with no capital at risk. That setting typically involves little emotion. Adding real money often changes how the same trader behaves.

TradersWeek editorial view: coding entries and exits does not finish the system. The remaining human procedure is the trading-psychology-process: accepting or skipping the next signal, choosing which procedures run, and deciding when to shut one off. Those choices can be written so they can be tested with the same discipline as entries and exits.

Accepting or skipping the next signal

Traders commonly skip or overrule generated signals, including signals that appear around scheduled policy announcements. That discretionary skip or reversal is a signal override: the next trade is changed because it feels uncomfortable.

The mechanical-trading-system already mapped inputs to a signal. The live question is whether that signal is accepted. Editorial view: write acceptance and abstention into the same procedure, so discomfort is not an unwritten veto.

Choosing which procedures run

Choosing which coded strategies to run can be more stressful than allowing a chosen strategy to execute. Strategy selection is that portfolio-level choice: which coded procedures stay active and which stay idle.

After a strategy is selected, unused alternatives can look better in hindsight and encourage restless switching. Editorial view: write which procedures stay live as a rule, so an idle alternative that looks better later is not a reason to reopen the book.

Deciding when to shut one off

Weak live results plus personal attachment to a self-built procedure can delay turning that procedure off. A shutdown rule is a pre-agreed test for pausing or removing a live procedure instead of waiting for a hoped-for rebound.

A run of five consecutive losing trades against the prevailing trend is presented as a test of whether a trader can stay with a mechanical procedure. That is a test of consecutive-loss tolerance: the capacity to keep following a procedure through a losing streak without intervening.

Editorial view: if the off switch is not written in advance, emotion still decides whether the procedure remains live.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
21 of 22 in the Mechanical trading system track
202047-47 pp.Next on Mechanical trading systemComfort, not theory, keeps mechanical rules in useBoth a pre-stated underlying-theory and a story-free rule set are treated as acceptable ways to specify a mechanical-trading-system.
All readings on this track · 22 readings
  1. 1985Treat a shared mechanical printout as a public script
  2. 1988Pessimistic margin ranking for mechanical systems
  3. 1991From a differenced-average sketch to coded rules
  4. 2003Commodity enthusiasm is not a complete system
  5. 2005Reader surveys as system evaluation checklists
  6. 2008Critiquing unchanged mechanical signals in evolving markets
  7. 2010Read a mechanical trading system catalog as a specification checklist
  8. 2011Specify mechanical system signals as one testable procedure
  9. 2012Treat a packaged mechanical system as one inspectable procedure
  10. 2013Mechanical trading systems as complete signal procedures
  11. 2013Testable cycle rules as one procedure
  12. 2014Evaluate mechanical trading systems as one procedure
  13. 2015Mechanical trading systems as one testable procedure
  14. 2016Evaluating mechanical trading systems as testable procedures
  15. 2016Reading a systems catalog as one mechanical procedure
  16. 2018Mechanical systems as testable signal procedures
  17. 2019Treat mechanical system listings as specification audits
  18. 2019Match the automation stack to mechanical system constraints
  19. 2019Bar size as a mechanical system construction constraint
  20. 2020Interrogating mechanical system listings as one procedure
  21. 2020Mechanical systems still need emotion rules
  22. 2020Comfort, not theory, keeps mechanical rules in use
By fieldDecision process416 readingsBy year2020165 readings
All 322 readings tagged Mechanical trading system
Also on Mechanical trading system5 readings
1985Treat a shared mechanical printout as a public script1987Operator gut check when two systems conflict1987When profits break the trading process1990Encoding expert hunches into a mechanical trading loop1993Four-subsystem trading system construction