Mechanicalise Your Trading, A Great Habit to Have

Trading Mechanical

The first quarter of the year had just passed by and we are already moving towards the end of April. While it took me a while, only very recently did I manage to complete the review of my trades from Jan-Mar. Just to be clear, I’m not updating my rules but this is one of the few occasions where I check that I am still intact with my trading plan.

Cutting the story short, I had a random realisation of something useful ideas, and I thought to share it with you. The interesting part of my trading, which I’ve come to realised recently, is that I’ve made my trading very mechanical. While there is plenty of room for improvement, I only realised this idea that everyone should learn to Mechanicalise your trading and this should be done as much as possible.

I was pretty surprised by myself when I thought of this because it sounded like a common sense approach initially. However, drilling now to it a little more, I realised that this is an unconscious process for many professional traders, and unless you box it up, many don’t realise that they do it unconsciously. The crazy and powerful thing about this is that, while you could have done it unconsciously, you should also try to do it consciously. With that, here are some ideas to elaborate my point.

Reducing your Options Systematically

So, to give you a clearer picture of what I’m trying to do, let’s use the example of writing your trading plan.

When you are incorporating your trading rules, one of the things that you should be doing when finalising your rules is to remove any parts that give you choices. Just to be clear, I’m not asking you to change the way you trade the market. Instead, I’m asking to you make your rules are mechanical as possible.

For example, let’s say you have a set of take profit rules and you have the choice of

  1. Taking Profit at a Fix Target
  2. Taking Profit based on Price Action
  3. Taking Profit using Trailing Stops

Trading choicesAt quick glance, rule No 1 and 2 requires you to take money from the market and rule No 3 helps you cut your losses. In my view, both of them are two distinct trade management styles, some of you may not agree with me, but, for the sake of discussion, let’s stick with that for now. Assuming that I’m right, the idea here is that I’ve now narrowed down my options, since rule 1 and 2 are in the same category, I can eliminate one of them.

So the next question that I’m going to ask is “Which rule requires more judgement?” and “Which rule can be most mechanical?” To me, the clear winner is rule No 1 and that’s on the basis that I can enter my profit target before I enter the market. So, from that point onwards, I only take profit on fixed targets.

Walah.. I have mechanicalise my rules!!

Can you See the Benefits?

In order to avoid any confusion, here are the benefits of doing what I did.

  1. I’ve reduced my rules from three choices down to only two. Remember the idea of Keeping It Simple? This is a big achievement because, under stressful conditions, the mind cannot handle options and choices. Remember the last time you were stressed and were forced to make a decision with many choices, you got confused? That’s exactly what we’re trying to avoid.
  2. Using rule no 1, I can become very mechanical. By that, I mean I can place my entry, stop and take profit orders all at the same time. More importantly, I don’t have to open my chart ever, and I can be assured that I will either make money or lose very little money. No kidding, this is how trading is made effortless.
  3. The most important thing above all, is that I have stuck on to my trading beliefs. You see, rule 1 and 2 were fundamentally the same thing in the sense that I consistently take money from the market. So, by removing one of them, I have not changed the way I take profit, I’m just taking profit at a different location. Sure, I could have made more money but I’ll never know the answer until I have a large enough sample size. Making a decision in that one trade will not make any different. Remember that I’m not here to beat the market, as long as I’m taking money out of the market, I am a winner.

Also, I left rule No 3 as it was because reducing my losses was part of my trading already and did not change it.

Make Mechanicalising a Habit

Now, that was just a simple illustration of how one can make your trading very mechanical. However, the key to incorporating it successfully is to make it a habit. More importantly, it is about doing it consciously.

In fact, this is a thinking process rather than a improvement process. You want to be thinking about making trading as mechanical as possible in every aspect of your trading, from when you look at your charts, to how you identify your trade setups.

On the other hand, while I’m not sure if the word “Mechanicalise” even exists, but trust me on this point, if you truly want to keep trading simple and with little emotions, then make trading as mechanical as possible. The more you do it, the more you’ll realise trading will be easy. However, it will take some time to get the ball rolling and it does require a conscious effort before it gets into autopilot.

Because the flip side is More True.

Trading Too Many ChoicesWhen new traders need to make a judgement call or make a subjective decision on a trade, that’s when it usually goes wrong. You start thinking about what ifs and what nots. These are the decisions that you should have made before you entered the trade and you should not be thinking about this kind of discussion when you are already in the market.

This is the type of trading that you want to avoid. Hence, mechanicalising it from the start is crucial.

Note: I’m not suggesting that you should start trading using robots (unless you have been doing it already) because by doing that, you are fundamentally changing the way you trade. In my view, the human mind is still the most powerful computer ever. Again, this is just my opinion, so no offence to EA traders.

Conclusion

As I mentioned, mechanicalising your trading rules is a thinking process. Call it a habit or even an unconscious process – because either one is correct. But the most valuable asset that you can gain from this exercise is that you trading will improve sooner or later. While trading is not Black Magic, if done well, magical things can happen.

 

My New Book

Cover TYE Page

In case you didn’t read about it, I thought I let you know that I will be launching my new book this Sunday. The Secrets of Trading the First Pullback (more here) will be available from Sunday onwards! Make sure to stay tune for it.

Thank you for reading and have a great weekend!!

 

2 Comments

  • Gene

    Reply Reply May 18, 2014

    Good post. Are you trying to trademark “Mechanicalise” and “mechanicalising” as they are not in the dictionary. Mechanize and Mechanizing would be the generally accepted spelling. One of my mentors said ” If you can’t define a rule well enough to program it into tradestation, keep working on it”

    • Alwin Ng

      Alwin Ng

      Reply Reply May 19, 2014

      Great advice from your mentor, thanks for sharing.
      Haha.. nah.. no trademark required.. plus, you got what I was trying to say.. 🙂

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