Mechanical Trading Systems: Pairing Trader Psychology with Technical Analysis



Mechanical Trading Systems discusses the advantages and disadvantages of mechanical trading systems; the dangers in system development and how to avoid them; the optimal methods for back-testing trading systems; position sizing and other risk quantification tools; and methods of improving rates of return on investments without significantly increasing risk.

Author’s Introduction:

Chapter 1 defines mathematical technical analysis, distinguishes it from classical technical analysis, and shows the psychological reasons behind why it works. Chapter 2 looks at the two basic flavors of mathematical technical indicators: those attempting to capitalize on the market’s propensity toward mean reversion (i.e., oscillators), and indicators that profit from trending price activity (e.g., moving averages).

Chapter 3 examines trend-following trading systems and shows how even the most simplistic of systems can produce a respectable rate of return while enduring relatively moderate worst peak-to-valley drawdowns in equity. Chapter 4 looks at simple intermediate-term mean reversion trading systems.

Chapter 5 explores short-term—including swing and day trading—systems and the personality traits needed to succeed with these strategies. Chapter 6 acts as a comprehensive review of the major categories of trader types (trend-following, mean reversion) as well as the typical time frames (long term, intermediate term, swing, and day trading) in which they operate.

Chapter 7 examines the many benefits offered by mechanical trading systems that have not been previously addressed. Chapter 8 discusses the pros and cons of various traditional price risk management methods, such as stop loss and volumetric price risk management. Chapter 9 looks at improving the overall rate of return through three methods:

  • 1) The addition of various low and/or negatively correlated assets, such as crude oil and foreign exchange futures, into a single trading system.
  • 2) The staggering of parameter set trigger levels for the same system
  • 3The combination of mean reversion and trend-following systems within a single trading account or fund

Chapter 10 examines how a trader’s knowledge and experience can be utilized within the framework of a mechanical trading system. Chapter 11 examines the link between mechanical trading systems and transformational psychology, covering in detail issues such as self-worth, single-mindedness, discipline, nonattachment to the results of one’s actions, and recognition and releasing of old emotional patterns.


  • Dispelling Myths and Defining Terms
  • Mathematical Technical Analysis
  • Trend-Following Systems
  • Mean Reversion Systems
  • Short-Term Systems
  • Knowing Oneself
  • System Development and Analysis
  • Price Risk Management
  • Improving the Rate of Return
  • Discretion and Systems Trading
  • Psychology of Mechanical Trading

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