Mechanical Trading Systems: Pairing Trader Psychology with Technical Analysis

TIME FRAMES, TRADING SYSTEMS, AND PERSONALITY TRAITS

Although there are almost infinite delineations of time frames and just as many variations of trading systems, I will use the systems and time frames mapped out in Chapter 3, Chapter 4, and Chapter 5 to examine different personality types and how these types naturally gravitate to particular time frames and strategies.

Many of the advantages and disadvantages of these categories overlap. Wherever possible throughout this chapter, however, I try to introduce unique and previously unexplored aspects of prerequisites for success in each trading methodology and time frame.

Long-term Trend-Following System Trading

Typical duration of trade: 5 to 10 monthsExample: MACD

Advantages:

• Requires least attention to the markets.
• No intraday action required.
• Typically generates largest per-trade profits and enjoys the best profit to maximum drawdown ratios.
• Works with many negatively and/or uncorrelated asset classes.
• Because it entails the fewest decisions, it is often viewed as the least stressful of all mechanical trading strategies (assuming the trader does not find sitting on positions long term without reacting to short-term fluctuations stressful).

Disadvantages:

• Inactivity.
• Inability to capitalize on obvious short-term, event-driven (government reports, news events, etc.) countertrend opportunities.
• Requires overnight margin.
• Typically experiences poor win/loss ratios and a large number of consecutive losses.
• Often risks larger percentage ...