2006issue C041-3
Permission and fill gates for mechanical systems
A mechanical trading system can be written as a setup that grants permission and a rule-based entry that still has to fill. A blank signal log then records designed abstention or an order that never existed.
- A mechanical trading system issues buy and sell signals from written rules, either as a passive program that only marks them or as an active program that also submits the orders.
- Construction starts by choosing the assumed market condition, then splits the write-up into a setup permission list and a rule-based entry that states how the position is taken.
- Stacking extra setup conditions can suppress every signal, and a long entry filter can remain unfilled while price still advances.
- Statements use if-then logic without an else branch, and they run only in software that already exposes the needed command library, syntax, and on-chart signal display.
A rule-driven program, not a discretionary one
A mechanical trading system is a rule-driven program that issues buy and sell signals without discretionary intervention. The same definition covers a passive program, which only marks buy and sell signals and leaves order placement to the operator, and an active program, which also submits the orders once its rules are satisfied.
Both signal-only and order-placing programs face a delay between the moment rules are written and the moment conditions are later met. During that wait, a trade the rules would execute may no longer be wanted.
Choose the market condition first
Construction begins by choosing the market condition the rules will assume. The historical workflow names four choices: a directional trend, a sideways range, a reversal structure, or a breakout.
Reversal-oriented construction is described as watching W and M formations and using a parabolic SAR flip as part of the signal logic. Parabolic SAR is a stop-and-reverse reading of price structure that flips long or short on the chart and can serve as a repeatable reversal or trend-state condition inside a larger rule set.
Setup grants permission, entry asks for a fill
After a template of indicators is chosen, the written system is split into a setup and a rule-based entry. The setup is the permission list that must be true before any entry rule is allowed to fire. The rule-based entry is the fill gate of that procedure: after setup conditions are true, it gives a specific instruction for how the position is initiated, including stops, limits, gaps, or next-bar market orders.
Stacking extra setup conditions can suppress every signal.
Trend-following setup templates
Illustrated trend-following setups include a 20-day simple moving average crossing a 50-day simple moving average; a parabolic SAR flip from short to long with RSI above 35; and a DMI+ cross of DMI- with ADX above 25 and MACD above its signal line.
One template waits for a DMI+ cross of DMI- while parabolic SAR is already long and while ADX is at least 25. The same write-up notes that a late ADX reading can withhold the signal until after a move has started.
Long entries that can stay unfilled
Rule-based long entries include buying the next bar one increment above the current high, using a buy stop above the market, requiring a gap opening, waiting for three higher closes, or using a limit on a pullback. Any of those filters can remain unfilled while price still advances.
If-then statements and platform commands
System statements follow if-then logic without an else branch. If named conditions are true, then take a named action. There is no else branch that invents a fallback trade.
Those statements can be executed only in software that already exposes a reserved command library, if-then syntax, and on-chart signal display. Command spelling is not portable across platforms.
All readings on this track · 21 readings
- 1987Constructing parabolic stops and cycle-window averages
- 1989Evaluating always-in parabolic SAR trailing stops
- 1993Constructing parabolic time-price trailing stops
- 1995Constructing parabolic SAR as an accelerating trail
- 1995Constructing a noise-buffered parabolic trailing stop
- 1997Constructing a parabolic trailing stop that only tightens
- 1998Triangle breakouts filtered by an exponential average and exited with parabolic stops
- 2000Treat volume-price imbalance as a hypothesis and let Parabolic SAR hold the exit
- 2002Constructing volatility stops from average true range and parabolic SAR
- 2002Parabolic SAR construction from stop outputs to reversal signals
- 2002Always-in-market SAR trail with directional confirmation
- 2004Forex trend confirmation with Average Directional Index, Parabolic SAR, and trendlines
- 2006Permission and fill gates for mechanical systems
- 2008A Relative Strength Index channel for profit lock and a trailing stop for capital protection
- 2010Building loss limits from the parabolic stop-and-reverse plot
- 2015Dual-zone currency indexes filter parabolic SAR signals
- 2016A parabolic trailing stop is not a complete system
- 2019Assigning jobs in a stochastic, parabolic, and moving-average stack
- 2019A three-filter stack as a redundancy test
- 2020Mechanical Parabolic SAR as an always-in flip after a breakout
- 2020Layering Relative Strength Index, MACD, and Parabolic SAR onto relative rotation maps