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Chapter 31, Part I. Mechanical Trading System Intro. Page 4

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 27, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

    Aug 28, 2009
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    Commander in Pips: Good. With all other aspects, a mechanical approach is quite the same as an analytical one – you have to specify a definite target and create your own algorithm. “Create” does not mean to invent something really new. Trading has gotten significant developments in recent years, so to create something really new is very difficult. In algorithm creation you probably will be focused on combinations of existing technical tools, but still the way you chose to combine them will let you invent something really outstanding. But first, let’s specify two Big Whales that are a foundation of any trading system:

    1. System has to catch a trend as early as possible;

    2. System has to have some built-in algorithm that protects you from whipsaws and reduces its effect;

    Pipruit: Hm, I see here something in common with the analytical approach too. For instance, remember trading with MA? If you apply too long of MA periods then you will have small whipsaw action but you catch the trend very late or even may not catch it at all. If you apply too short a period, then you will take a lot of failure penetrations of MA before the trend will start. And later within the trade you can get fake outs, that force you to exit early and reenter at a worse price.

    Commander in Pips: You’re absolutely right. The problem with these issues is that they are in contradiction of each other. So you have to find some compromise – maybe to step in a bit later but reduce losses on whipsaws – this is a question of fine tuning of your system.

    To be absolutely honest, you may try to create the system that will recognize specific patterns. But this task looks even harder, because the market never shows perfect patterns and even the same pattern looks different every time. Now imagine that you will have to do to specify common rules for “slightly different patterns” of entering/exiting the trade. That is easier said than done.

    P.S. This lesson was written by Sive Morten, who has been working for a large European Bank since April of 2000, and is currently a supervisor of the bank's risk assessment department. Sive's knowledge of forex market and banking industry is vast and quite complete. If you have any specific questions about forex, banking industry, or any other financial instruments, please post them on the next page and Sive should answer soon.

    Note: FPA ranks are earned in the battles against scam, not in the classroom.
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