Mechanical Trading Systems: Pairing Trader Psychology with Technical Analysis

DISCIPLINE AND FLEXIBILITY

Although discipline and flexibility might sound like mutually exclusive terms, as I have shown in Chapter 10, this is not the case. Traders must be disciplined enough to consistently execute trades irrespective of personal winning or losing streaks, bullish or bearish market consensus. Such a disciplined approach usually entails mastery of open-mindedness so that they can continuously view things differently from the crowd. Moreover, mechanical traders must be flexible enough to abandon their disciplined adherence to a trading system once that system is no longer robust enough to generate profits (due to a paradigm shift in market behavior).

Zen Buddhist philosophers often attempt to explain the nonlinear nature of reality with paradoxical phrases: true, false, both and neither, all at the same time. Although at first glance the phrases seem nonsensical, it is the essence of the multidimensional nature of all things, including market behavior. Moreover, the phrase epitomizes the flexible mind-set of successful traders. For example, I can state: “It is true that traders succeed by following the trend.” Yes, this is true for trend traders, but it is false for nondirectionally biased mean reversion traders. Next, I can say that the statement is both true and false because some system traders employ both trend-following and nondirectionally biased mean reversion models simultaneously. Then it could be argued that for other market participants, such as market ...