I Robot, You Human: Mechanised Trading Systems

Have you ever wondered if a robot would beat you at your own trading game? Yes, you have a trading system. Yes, you trade your system. But you are human. You are open to temptations. These temptations lead you to open or close trades either prematurely or too late. But what if you simply programmed a robot, or traded automatically? (Programming some piece of software with your set of triggers, essentially creating your own black box system – the difference with your black box system and the other systems on the market is that you know what your system uses as triggers) Would your mechanised-robotised system beat your human implementation of your own trading rules?

I've always pondered this question. I'm aware that there are a few funds out there that command hundreds of millions of dollars that use true systemised trading rules that are operated by a computer. But those black box systems are usually backed with multi-million dollar research. The odd retail trader like you and me cannot ever hope to match that level of sophistication.

Most retail traders are left to test their trading systems with their software based back testing methods. But here's the fallacy of logic. You are testing your trading rules against historical prices. And we all know that historical performance does not indicate future performance. But that's not the point of this entry.

The fallacy I see in back testing your trading system then claiming to trade using your system is this: You use a mechanised system to back test your system. You either have some sort of trigger like higher highs in a 50 day window AND a MACD crossover OR a EMA crossover for example. Then the back test spits out a back test result. If you took all the possible trades that your system would have triggered upon, then you would have say 73% wins. Here's the fallacy: you are a human, trading your mechnised system that is proven using a mechanised back-test, but you are human.

Humans make mistakes. Humans aren't perfect. We are open to fear, greed and a vast array of emotions. We can be tempted. Misled and misinformed. We aren't pure. We have biases. Therefore, even if your system checks out with a mechanised back testing system, it doesn't ensure your success as a trader. That is unless you programmed a computer/robot with your system. To trade it day by day, unbiased. Unemotional.