Why Traders Fail To Follow Profitable Mechanical Systems

iStock_000016397279XSmallOne of the questions I often receive from traders is that they have bought (or leased) certain well known trading systems yet they cannot make money trading them. Of course, some trading systems are just outright useless. The rare good ones, however, do exist. Yet, even though those trading models produce profit if followed exactly, many traders fail to do so. What went wrong?

Discipline Required

To follow a mechanical trading system, you have to do exactly what it is telling you. It requires discipline from you to follow the rules exactly. Even though a trading system can be relatively simple, it is still not that easy to follow a system 100% if you are doing it manually. Don’t forget that you may be holding a certain view about the market when the trading system is telling you to do something opposite to what you deem correct. Just this difference in opinions can cause hesitations leading to missed trades and slippages.

Some trading systems can be executed automatically on your trading platform or directly with your brokerage. Such arrangement saves you from not able to follow the trading systems correctly or consistently. Yet, even with the help of full automation (or a hired trader who execute the orders with no emotional attachment), the principal holder of the trading account can still interrupt the use of the trading system. For example, after several significant losses, you, as the account holder, can choose to stop following the trading system all together.

As you can see from the examples mentioned above, the problem is psychological and a hard one to overcome.

Anxiety From Uncertainty Swing Our Emotion Wildly

Whenever an order is placed, you will anticipate that it will be triggered and filled soon. It is normal for anyone to do that. You need this feedback because if the order, for some reason, is not filled, we need to deal with the problem. This type of anticipation is neutral to our emotion and does not affect us much until we have to scramble to fix the order placement problem due to platform or other issues.

After you opened a position, your anticipation changes to every tiny movement of the price. When it goes your way, you are excited and feel good. When it goes against you, you become anxious and feel bad. Your emotional swing happens naturally because you want to be right. Your logical mind may tell you not to worry but you cannot control yourself because it is just how our brain functions.

Worse yet, you may hold an opinion completely opposite to what your trading system is doing. This adds stress on you in addition to the emotional swings throughout the period as you are holding an open position. As you invested so much emotion into a trade, when it comes to an end, be that a loss or a win, it has more impact on you than normal.

Humans are not built to handle that many emotional swings a day. But traders have to deal with that day-in day-out all the time. The emotional distress builds up quickly and uses up our will power to follow the trading system. Eventually, it is not whether the trading system is performing that causes you to stop following the system. At the end, you are psychologically distressed to the point that you are subconsciously resenting the trading system. You are conditioned to find excuses to not follow the system.

Trust Is Built On Actual Experience

Many retail traders do not know that it is a common practice for many professional traders to track their trading models in real-time for several months before they would commit real money to trade them. There are several reasons why it is a good idea to do so.

First, the real-time tracking serves as a walk-forward test that has no benefit from hindsight. If the model breaks down during this testing period, you get to walk away with no harm done to your trading capital. You also get to make certain adjustments to the system so that it becomes more robust.

Second, it is a test of your compatibility with the trading system. When you see the trading system in action, even with a simulation trading account, will get your emotions involved because human naturally anticipates the results. The experience from this testing period will tell you if you can handle the emotional distress. It also trains you to handle them with less attachment to each individual trade.

Over time, your focus will switch from paying too much attention to each open trade to looking at the net results every week or even every month only. One thing important to remember is that when you deploy a trading system, your role is no longer the trader. Your new role is the manager of this trading system as you delegated the duty of trading to your trading system.

Importance of Regular Review of Performance

Conducting regular review of your trading systems is a necessity. Although you want to distance yourself from the emotional swings on each individual trade, you still need to study them to make sure they are doing exactly what you expected them to do. You need to find out if the slippage is still within acceptable range. You also need to know if the overall performance statistics is matching those in the past.

The goal for these reviews is to identify potential problems so that you can fix them before significant impacts happening to the performance. New insights are often gained when the trading system is going through an environment that has no resemblance to any part of your historical data. New models can then be developed based on the findings.

More importantly, these reviews allow you to keep your emotions in check because it could be a long time since you conducted your walk-forward testing. You could be enjoying a period of exceptional performance for the trading system which would swing your emotion on a different level. By conducting the reviews, it will keep you grounded and stay focus on controlling the risk and managing the trading system rigorously.

You Need A Business Plan

The business plan for mechanical traders mainly focus on capital allocation, position sizing, review procedures and the conditions for which the trading system has to be retired. Deterioration of certain performance statistics for a period of time should trigger termination of the trading system. It does not mean that you will never trade the same system again. The idea is to protect yourself from a system that may cause you serious drawdown.

After investigation, you may be able to identify the problem and changes to the trading system may solve the problem. Remember that this modified trading system is not the same as the old one. Unless the historical behaviour is very similar to the old one, you should treat the modified system as a new trading system, for which it has to go through its own walk-forward testing.

Just like a car, a mechanical trading system may have run its course and the edge it depends on may no longer exist. In that case, if you can tell from the price data of this subtle changes, you do not need to wait until a serious drawdown happening first before pulling the plug. As long as you have the conditions written down clearly in your plan, it will save you the unnecessary emotional struggle when the time comes.


Trading mechanically, especially using a trading system from someone else, can be very tricky. The emotional issues of using such a trading system can have many negative effects on you that you do not realize. By understanding the potential emotional problems you will be facing, you can learn to incorporate better practices to minimize their impacts on you.

Ultimately, as a mechanical trader, you want to make trading stress-free. You can if you embrace the fact that focusing on the individual trades too much in real-time is counter-productive. By training yourself through walk-forward testing, you can slowly detach yourself from the individual trades and focus more on the overall results. Completely stress-free may be difficult to achieve but getting close to that is a wonderful thing.


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