ALGO -TRADING : Developing a Mechanical Trading System

Algo trading

Mechanical trading system can be defined as methods of generating trading signals and quantifying risk that are independent of an individual trader’s discretion. Although the advantages in utilizing a mechanical trading system are manifold, most market participants agree that their greatest benefit is the tempering of destructive trader “emotionalism” – which is considered to be the enemy of all successful market participants from the decision-making process.

Obviously mechanical trading systems can be developed based on any number of objective criteria including interest rate differentials, gross domestic product, or EPS. But there is a fundamental limitation in using such tools. These tools require an in-depth understanding of market, trading instruments, equity patterns and technical analytical tools. Although in-depth knowledge of underlying fundamentals is not a necessary requirement. In fact, lack of fundamental knowledge allows traders to apply their system as readily to equities, live cattle, foreign exchange, commodity markets etc. Avoiding discretionary and Using a nondiscretionary, mechanical system is not easy—otherwise, everyone would do it. There is a lot of work in corning up with a system, testing it, adjusting it, and trying it correctly and convincingly. The tendency for many people is to "wing it" and see if it works. That method leaves the trader nowhere.