Hello Everyone,

I want to switch gears this week and talk about this…

There's no such thing as a true mechanical forex system!

Before you send the men in the white coats to throw a net over me let me explain…  :-)

First let me talk about what I think a mechanical system is.   I will only talk about buy trades for this discussion.

1.   It is a system based on a set of step by rules.
2.   If condition A + condition B occurs then buy. (There can be endless conditions)
3.  Once in the market the system will also place a protective stop.
4. Based on certain criteria the system may use a trailing stop strategy.
5. Based on a certain set of conditions the system will exit the trade.

Now please note that because this system has hard-coded a set of rules/conditions into the software there is no room for discretion so… What we have is a truly 100% mechanical system.  Or is it?…

Before I go on, let me say that I've had 100's of conversations with traders around the world and they hate the word "discretion".  They hate the idea that something can't be boiled down to a simple can't fail no thinking recipe.  Well I'm here to tell you that is 100% true!!!  I know  that isn't what you want to hear and certainly not what some other system creators will tell you but it is the truth and here's why…

On the surface if a system meets all the 5 steps outlined above then it is technically 100% mechanical and it requires no discretion on your part and every trader should get the same results but…

Now here's what you have to get your head around…  The person that made the system used a set of totally discretionary rules. 

 In other words, lets say they decided to use a moving average crossover system to trigger an  entry.  They might say… "Hmmm, lets see how a 5 period and 13 period simple moving average works.  Then they may try a smoothed moving average to see if it works any better.  Then they may try different moving average lengths.  Then they may try a different formula on the moving average like basing it on the average of the high, low and close. 

 Anway, the list goes on and on and on as far as variables go.  And generally the person will use back-testing to see which combination works best.  Now you have to keep in mind this is all still totally dicretionary on the the system creators part because they have no proof this will work in the future as all their tests are based on what happened in the past.  And as they say on those little disclaimers on all web pages, "past performance doesn't guarantee future results.".

The VERY IMPORTANT thing I'm trying to get you to understand is not to get a false sense of security because something is totally mechanical.  Yes it will reduce trader error, but it can't guarantee any better overall performance.

Think how many forex robots are coming out on a regular basis?…  And how many have held up with regular profits week after week and month after month?  Maybe a handful at best.   If having a totally 100% mechanical forex system was the answer then we would all be laughing to the bank.

I've already talked about it in the past, but major financial firms hire the smartest people and have millions of dollars to throw at mechanical systems and yet most don't make money. 

The botom-line is trading is a puzzle that can't be solved by logic alone and this is what drives all of us traders nuts!!!

On the surface, it seems like a set of rules based on logic put into a 100% mechanical system would be all it takes to make a lot of money but…   The reason it doesn't always work is because we trade on emotions, opinions, fear and greed and…   As long as we do this, the market will keep zigging and zagging and throwing all our logic and systems out the window.

A little more on discretion… Much of what we do in life has discretion to it.  Think about a sport like golf… Even though Tiger woods has near machine like precision, on every shot he needs to use his own personal discretion on how to make the shot suit his current placement on the green. 

The bottom-line is discretion is not a dirty word and when used correctly, a little goes a long way.

To me discretion is not some wild fly by the seat guessing, but based on all my years of experience and it has become a real asset to my trading.  To me the best types of traders are those that follow a strict set of rules but know when they need to bend the rules to suit the current trade setup.

Am I suggesting you abandon your mechanical systems to become a discretionary trader?  Far from it!  I am just trying to open your eyes to the fact that a so called 100% mechanical forex system isn't the "Holy Grail".

Hope this gives you some food for thought….

Until next week, peace and prosperity,

Jeff Wilde

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