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Generating a Mechanical Trading System

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Old 25-02-2015, 20:48
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Default Generating a Mechanical Trading System

Mechanical trading has become increasingly popular among forex traders as the ability to trade forex online electronically has blossomed in recent years along with the advent of online currency brokers.

The computer code used to implement a typical mechanical forex trading system will be based on the sort of market analysis and decision making process that the best currency traders go through when considering taking a position.

About Mechanical Trading

The essence of mechanical or algorithmic trading, as it is sometimes known, involves programming a computer to first look for signals that would ordinarily indicate a significant future move in a particular direction and to then act accordingly by executing an appropriate transaction in the market.

Furthermore, the majority of mechanical trading systems are based on technical analysis of some sort, which usually includes the generation of objective and relatively reliable technical trade signals like moving average crossovers, for example.

Basically, in true mechanical trading, the entire trade decision and execution process is fully automated and occurs without actual trader involvement. Some traders prefer to retain some discretion by having their market monitoring systems generate a trade suggestion that they can then choose to act on. This is often called trade signal generation and falls just short of an actual mechanical trading system.

Implementing a Mechanical Trading System

The first stage in putting together a successful mechanical trading system is to come up with a forex trading strategy that works consistently to generate trading profits. Most commercially promoted automated trading systems incorporate complex technical analysis based algorithms and money management principles, although you can choose a relatively simple trade decision process to implement initially.

You will then need to choose a trading platform and learn a suitable programming language to actually program your new system yourself. Alternatively, you can hire an experienced programmer to do this for you, although you might then risk exposing your proprietary system to another party. Also, changes are harder and more costly to make if you cannot do them yourself.

You will then need to choose a trading platform and learn a suitable programming language to actually program your new system yourself. Alternatively, you can hire an experienced programmer to do this for you, although you might then risk exposing your proprietary system to another party. Also, changes are harder and more costly to make if you cannot do them yourself.

Testing a Mechanical Trading System

Once you have put together and automated a currency trading strategy that you think will work well, you can back-test it over historical exchange rate data in a variety of market conditions in order to see how the trading system would have performed in the past.

Of course optimizing past performance does not always assure future success with a trading system, but this sort of historical analysis can at least give you a sense of what to expect with the system in terms of its average performance and drawdown risk when it is placed into a live trading environment.

The next step in testing a new mechanical trading system is to open a demo account with an online forex broker that you are considering using that supports the system you have written the algorithm for. Once you are comfortable with the demo account results of your mechanical system, you can then fund the account and set the system running.
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