Guide to Mechanical Trading
Welcome to CK Locke & Partners Research Division
Trading our mechanical strategies allows you to work or play without constantly watching the markets because entry and exit criteria can be met at pre-arranged price levels before the respective market opens. These exits include stop loss orders.
What is Mechanical Trading?
Mechanical trading is unemotional. Our collective experience suggests that traders that have eliminated emotion from entry and exit levels are generally more successful than other traders. Mechanical trading encourages traders to apply the rules of good trading that we all know, but find hard to apply. Some of these rules are:
Forced entry - procrastination is eliminated
In the absence of mechanical entry criteria, trading opportunities are often not taken because confidence is lost. Typically this occurs after a series of losses. When this happens, “Murphy’s Law” often applies whereby the missed trade could have paid for the series of losses plus more if it were taken.
Stop loss orders pre-set
Stop loss orders are applied by us on your behalf at pre-arranged price levels in order to manage risk. Eg if the tide turns soon after entry, your positions are exited at a pre-arranged price level in order to reduce risk. However slippage occurs on most trades. Slippage happens when actual prices received are better or worse than target entry and exit levels- usually the latter.
Allow profits to run
One of the biggest setbacks a non-mechanical trader has is deciding when to take profits. Mechanically based profit targets help to prevent the very common problem of exiting profitable trades too early. Given the fact that most trades are not profitable, profits should be maximised when they do occur in order to cover previous and subsequent losses.
Maintain Consistency
Mechanical trading promotes consistency. Just because something hasn’t worked a few times doesn’t mean it’s not good. Mechanical trading forces you to maintain consistency so that when a great trade takes place, you were there for it. Many traders start with a game plan, but lose it after the first few trades because they run out of confidence. They then look back in hindsight and find that the original plan would have been profitable if only they had stuck to it.
Become emotionally distant from the market
E.g. In 1997, coffee futures made an incredible upward move in a very short space of time. Traders like you held around 200 bought option positions that cost around AUD 1300 each which was also the maximum risk. Well over $50,000 profit per position could have been realised if profits were allowed to run. Only 4 of the 200 options made a lot of money (2%). Two out of the four traders were unable to be contacted during the big move. Ie, it can sometimes pay not to get too close to the market. Most positions were exited at break even because the options initially lost value. We have found that in the absence of mechanical trading strategies, traders tend to take small profits because it is instinctive to get out at the slightest change of direction. This bad habit occurs when traders are too close to the market.
Trading Psychology Tips
Draw -downs exist with any type of trading. A draw -down is the difference between an accrued equity high in relation to a subsequent equity low. For example, if your account balance started at $20,000 and went up to $40,000 and subsequently fell to $30,000, you would have incurred a $10,000 draw -down. A draw -down could be deemed as a series of trades whereby accrued loss amounts exceed accrued profit amounts. Draw -downs can be psychologically difficult to endure. All we can do as traders is hope that any drawdown will be minor or enough money has been made previously .The difficulty with trading in general is that unlike your regular pay, you don’t know when the trading profits
will come or how much they will be. Profits and losses can be cyclical in nature so the idea is to not get too excited when you are having a good run and not lose confidence during a draw -down. We believe that a good trading account should go down slowly and up sharply.
Another point to bear in mind is that the majority of individual trades are not profitable. This is normal. Our aim is that profitable trades should be large enough to cover the losers; hence the importance of letting profits run. A typical successful trading account will show plenty of small losses and a few big profits.
Risk Disclosure
Commodity Futures and Options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don't trade with money you can't afford to lose. This is neither a solicitation nor an offer to Buy/Sell futures or options. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this web site. The past performance of any trading system or methodology is not necessarily indicative of future results.
HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.
ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK. AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.
Diversifying into futures trading is generally accepted as a high risk –high reward class of investment. Therefore the onus is on you to consider whether futures’ trading suits your situation. The strategy’s hypothetical results are based on hypothetical back testing, hence CKL, while confident of future success are not stating or implying that hypothetical trading results are indicative of future performance. Furthermore CKL are not stating or implying that any profitable track record is representative of all clients’ accounts. The onus is on the client to determine whether or not there is sufficient capital to trade using the strategy.
CKL may offer advice as to starting capital amounts, however we accept no liability whatsoever if that advice proves to be incorrect. Similarly, if you are issued with any advice, CKL is not stating or implying that you have sufficient capital. Clients may wish to allocate more or less capital to that which is recommended (if at all). Lower starting capital will result in higher percentage profits or losses and vice versa.
The potential for loss exists as well as profit when trading speculative investments such as futures contracts. As with other speculative investments, there is a possibility of losing all your allocated capital. It is expected that you are aware of the risks and prepared to accept the risks associated with this type of investing. CKL cannot obtain sufficient personal information regarding your current financial circumstances and investment objectives. Therefore the onus is on you to determine whether futures’ trading suits your situation. Furthermore this paragraph does not indemnify any party from the risks mentioned herein and any other risks that are documented in the futures client agreement forms and in particular risk disclosure statement/s that form part thereof.