Mechanical Trading Systems: Pairing Trader Psychology with Technical Analysis

This is one of the two books that I bought recently by the same author. The moment when I flipped through, I know I will love this book. At the end... yes, I am right. This is one of those books that deserved a place on my shelf....

Richard L. Weissman produced an excellent write-up in this book. It focuses on mechanical trading systems even though the author did an excellent split by dividing the whole story into three significant groups (Trend following, mean reversion and short-term intraday system). As such, we have a very detail analysis in each case. The best part is....strengths and weaknesses are clearly stated and the readers enjoy the luxury to fit own-selves into each respective category.

So far, this is the only book that I agreed almost 99%... The only school of thought that I object is on the issue of parameter optimization. Other than that, I see myself nodding all the way and I think I am very much living in the same world with the said author. One good example where my small mind is aligns with this book... The author mentioned umpteen times about the importance of simplicity: "I believe the more conditions added, the lower the probability of replication of similar results in the future." Simplicity is the key word here and simplicity is my own motto since day one....

More interesting quotes (Excellent reminder?) as below:

1. The main purpose in adopting mechanical trading systems is reinforcement of positive trader psychology and elimination of destructive behavioral habits. The reality of taking what appears to be an optimal profit off the table only to witness its doubling or tripling is absolutely devastating to trader morale and discipline. 

2. Usually newcomers' temptation to eliminate the outliers grows stronger after a large unrealized profit gives back a significant portion of potential gains. The facts are... No one ever captures the top or bottom of a trend... Cutting off the outliers hampers our ability to financially weather the equity drawdowns that are inherent in any trend following strategy and increases our risk of ruin.

3. Trade around the core position - this helps with the psychological problem of thinking you need to earn your pay by being active while not sacrificing your position. 

4. Logic might lead us to believe that 50% of all traders should succeed. The odds are much worse because the essence of successful trading entails consistently doing the natural and uncomfortable thing.

5. The more parameters added to a trading system, the more closely that system's criteria has been fit to the data. The closer the parameters have been fit to a particular data history, the less likely that these criteria will be able to filter out randomness within the data series. 

6. Mechanical trading system work because, through repetition, they train us to embrace the unnatural until it almost becomes second nature. 

This book may sound too simple to those who are looking high and low for get rich quick scheme. However, "simple" minded trader like me found it good enough since I stop searching for Holy-Grail long time ago, LOL. This book, in fact; serves as a good reminder to certain theories that shaped my belief since day one. As such, I appreciate the facts that it refresh my mind and reinforce certain beliefs that shake at times. Having said that, I am going to rate this book at 10/10. Next, I am going to continue with Richard L. Weissman's second book on "Trade Like A Casino"... Stay tune...