Is 100 percent mechanical trading possible?

Source: Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading Methods and Applications (New York Institute of Finance)

The major problem is the failure of the system to recognize when the market is not trending and its inability to turn itself off. The measure of a good system is not only its ability to make money in trending markets, but its ability to preserve capital during non-trending periods. It is this inability of the system to monitor itself that is its greatest weakness.

Another drawback is that no allowance is generally made for anticipating market reversals. Mechanical trend-following systems ride with the trend until it turns. They don’t recognize when a market has reached a long term support or resistance level, when oscillator divergences are being given. Most traders would get more defensive at that point, and begin taking some profits. The system, however, will stay with the position until well after the market has changed direction.

The mechanical system signals can be used simply as a mechanical confirmation along with other technical factors which I mentioned previously. Even if the system is not being traded mechanically, and other technical factors are being employed, the signals could be used as a disciplined way to keep the trader on the right side of the major trend.

Furthermore, mechanical system signals can also be used as an excellent screening device to alert the trader to recent trend changes. The trader can simply glance at the trend signals and instantly has several trading candidates. The same information could be found by studying all of the charts. The mechanical system just makes that task quicker, easier, and more authoritative. The ability of the computer to automate system signals and then alert the trader when signals are triggered is an enormous asset, especially when the universe of financial markets has grown so large.

This is an excellent post - amnonco clearly knows what he's talking about, unlike one or two others on this thread

I call these instances "boundary conditions".. they are all the little things you didn't think of when you designed the system, but will eventually crop up and cause P/L.

My analogy is to making a cup of tea -- easy right? But let's say you had to write down instructions for an alien, you might omit to mention "check the plug is in the socket" or something else that seems patently obvious.

Threads been dead for a while...

What are you guys views of a "robust system"? I have coded my system and whilst it gives a good equity curve on some markets, it doesnt on others...For me thats not good enough. IMO the acid test (apart from live trading) for any mechanical system is to produce similar results when backtested on any market in any time frame.

I'm putting new filters and conditions in my methodology in the hope of achieving this...If I don't make it, will most likely put trading away for good (well full time trading anyway)

I have finally been able to put together an automated trading system and I have been running my patterns on over 2000 stocks daily to look for trades and continue to backtest and develop better entry and exit patterns when I have time. I only use daily bars and I enter trades during first 15 minutes of trading days and exit trades at same time the day after the EOD data meets my exit criteria. I at first only used candlestick patterns along with prevailing 40 day trend and immediate 5 day trend but this cut down my trades to an average of 2 finds in 3 days and I require at least 1 trade a day. I have ended up using doji stars as an entry point along with support/ resistance lines and the other previously mentioned items. I now find 1.2 entries per day with the stocks I look at. I am always trying to find better ways for entry and exit, it has become a bottomless pit of time consumption and I sometimes take breaks a couple days at a time so I don't become burnt out. I want to take advantage of the price patterns that to me look like perfect waves on the chart and will but from my experience it will probably take me about 500 lines of code to replicate the conditionals. I am always amazed at how much longer this is taking to do than what I thought. So far my program, just all the conditionals, is about 4 Meg of text. Huge. It cycles through over 400 Meg of data when I backtest patterns and about 40 Meg of data daily to look for trades as I use the last 250 daily bars for this. I get a text file out of testing that tells me what stock hit what patterns each day and I paper trade from that and on the day after the exit condition is satisfied I use the worst price on the open of the day as my out price. I am not the most knowledgeable programmer and it has taken me about 300 hours of coding to get to this point but much more than that to dream up and research the pattern sequences I am using.

Best of luck to all!

Sounds good numbertea and similar to the system I am currently (trying) to develop. As you said, it is surprising how much time the indicator/signal research and actual coding takes. But, nonetheless, it is interesting.

Wish you success with your system

I and two of my fellow traders run 100% mechanical trading systems incorporated in a portfolio, so it is possible. The only problem is how to distinguish a prolonged drawdown from the normal ones ie. how to know when your system stopped working?

Exactly 4 months since I embarked on my coding adventure. Funnily enough at first I thought learning the programming language could take several months but writing my system just a few weeks, but its worked out exactly the other way round. I learnt tradestations easy language (well enough to get me going) in a few weeks but writing the system seems to take forever!

Is 100 percent mechanical trading possible?

- Yes.

We are all mechanical systems. Most people fail at trading. Some people are consistently successful. This may be luck, or may be because a series of rules were followed.
It does not matter here. I think this is known as the intentionality issue in AI.

I have written a system sort of based on a k nearest neibhour algorithm on the FTSE ~2 years ago.
I lost yr 1 and am gaining in yr 2.
The major pain is in actually following the rules.

Without the benefit of any proof, I do think automated rule systems that only use price data work better on indices.
I also know lcchong76's comment on 24/6/11 to be true - the market shifted around may '09 and did behave differently 'in spirit' from that point and my algorithm did not 'spot' that.

I wondered if anyone has looked into the sentiment based tools out there.