Rule 6: Fully Mechanical System

The simplest answer to why a system must be mechanical is that you cannot test a discretionary system over historical data. It is impossible to


Summary37

forecast what market conditions you will face in future and how you will react to those conditions. Therefore, in this book, we will restrict our­selves to fully mechanical systems.

If you can define how you make discretionary decisions, then these rules could be formalized and tested. The process of formalization could itself provide many interesting ideas for further testing. Hence you are encouraged to move toward mechanical systems.

You are more likely to make consistent trading decisions if you use mechanical systems. The manner in which a mechanical system will process price data is predictable, and hence assures that you will make consistent trading decisions. However, there is no assurance that these logically consistent decisions will also be consistently profitable. Nor is there any assurance that these trading decisions will be implemented without modification by the trader.