“The greatest benefit of mechanical trading systems is their ability to reprogram traders away from destructive types of behavior in favor of successful trading habits.”

– Richard Weissman, Mechanical Trading Systems

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A Systematic Approach to Entries and Exits

Rules-Governed Trading, Mechanical Trading Systems, and Algorithmic Trading (often abbreviated as “Algo”)–all refer to the same thing:  the systematic execution of a trading plan based on predefined criteria for entries, exits, and position-sizing.

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Strengthening Your Achilles Heel

A systematic approach to investing mitigates impulsive decision-making and removes emotion from the trading process.  This method of investing provides a strong defense against the weakest link in any trading system–the trader.

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Back-testable and Programmable

Since this  criteria is objective and can be defined in advance, it can be back-tested on historical stock market price data to ascertain past performance.  Since it is back-testable, this means it is also programmable (although it doesn’t have to be).  Programmed trading systems are also known as automated trading systems.  Automated trading systems, by the way, account for more than half the daily trading volume in U.S. equities.

Incidentally, if over half the daily trading volume of the U.S. is done via automated trading systems and over 60% of daily Philippine Stock Exchange volume is through foreign brokers, then it stands to reason a significant portion of the daily volume of the Philippine Stock Exchange reflects the deployment of automated trading systems.  Oddly, this fact rarely seems to have occurred to many of the older traders I’ve encountered on the floor.

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Against Canned Competence

Take note:  My advocacy of systematic trading is not to be confused with purchasing a “black box trading system” from a 3rd party trading system developer.   “Black box” refers to a trading system that does not reveal its trading logic to the purchaser.  When unleashed on a trading account, the software blinks and bleeps, and buy and sell signals mysteriously spew out or are even transmitted electronically to a broker.  According to the system developer, this unrevealed system is the holy grail sure to lead to trading success.  Meanwhile, the user is left in the unenviable position of not having the slightest clue how or why trading signals are being generated.

Oddly, those seeking comfort from canned competence range from retail traders to institutional investment professionals managing many millions of dollars.  While I don’t expect much from newbie traders, frankly I have little patience for investment professionals who are too lazy or incompetent to develop their own viable trading systems.  These are the same folks who blame the system or point fingers at the 3rd party Quant Service provider when a Black Swan lands on their heads and the fund implodes.

I suppose there’s a reason Black Boxes are commonly associated with disaster.

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At Invest Philippines, we take our trading system architecture very seriously.  We are proud to offer several proprietary Rules-Governed Trading Systems designed from the ground up and specifically engineered for use in the Philippine Stock Market.

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See

When Failure Is Not an Option

Merits of Rules-Governed Trading

The Primacy of Fixed Downside Risk

E. M. Murray.  Customized Portfolios.  Professional Management.  Fixed Downside Risk.