Book Review - Mechanical Trading Systems

I came across this book that is worth mentioning only because there are not many books covering automated trading systems. The book is "Mechanical Trading Systems" by Richard L. Weissman, John Wiley & Sons, 2005.


It is a book about mechanical trading system, that is, systems that can be automated or expert advisers (EAs), a term I have been using frequently. It is interesting because it explores the psychology of different trading systems that a trader needs to know in order to match the system to his own trading psychology, something I had talked about in here. But there is no holy grail, it appears the author has some successful automted trading systems which he openly said he will not reveal. His purpose is to share the usefulness of automated trading and how it can be applied as follows:


1. Trend-Following Systems: patience is the key and not getting out of a profitable trade too quickly. The psychological make-up to trade such systems are patience to wait for trade entries, long drawn trades (could be months), ability to give back a large portion of profits.


2. Mean-Reversion Systems: these systems are intermediate term trades and needs discipline; discipline to overcome crowd psychology, media hype and action price reading. There will be more losing trades than winning trades, but the losing trades are small in value but consecutively large.


3. Short-Term Systems: there could be many trades in a day and require quick thinking and fixed formulas for entry, exit and money management. These type of trading is intensive and require the trader to stay seated to the screen (but this is where automated trading comes in handy).


Most of the examples of trading systems are based on technical indicators. I can only infer these are probably not the systems to use since they have been revealed!


The author has also covered the usefulness of automated systems for backtesting, forward testing and optimisation of trade parameters. At risk is the convenience of optimisation and curve fitting of a set of data that does not represent future prices.

So this is a book worth reading so that you know yourself better and therefore have better grasp in handling/using EAs.