Mechanical Trading Systems and Why They Fail

By Richard K

Introduction to Mechanical Trading Systems

Most traders who have been trading long enough have somewhere along the line been exposed to mechanical trading systems, expert advisors (EA’s), or trading robots, and in most cases, their experiences with these systems have been very negative i.e. they lost money.

It seems to be a common occurrence that newbie traders fall into the trap of trying to buy the next best expert advisor that promises big rewards with very little effort. The internet is littered with these sorts of programs and they range in price from a few hundred to thousands of dollars.

Beginner traders are obviously willing to spend these amounts of money because they are led to believe that trading is easy by the people selling it to them. The truth is that no fully automated mechanical trading system can guarantee a return. These systems tend to perform well in the beginning but fail in the long run. Ask yourself: why someone would be selling you an automated trading system in the first place if it was so profitable?

The answer is that they make more money selling you stuff than actually trading their systems themselves.

That being said, I do believe that there are profitable mechanical trading systems out there but the only reason they are profitable is that they require continuous updating to adapt to continuously changing market conditions, or they are only activated when the right market conditions the system was developed for comes along. So rather than a plug-and-play, set and forget type of mechanical system, the ones that continue to work in the long run require a human element.

The mechanical systems that do work are mostly the result of hard work and years of development with stringent backtesting trading strategies and even then they are continuously updated to suit current market conditions. These sorts of trading systems are often not for sale unless you decide to take the time to develop your own mechanical system.

What Is Mechanical Trading?

Mechanical investing entails buying and selling stocks using pre-set criteria or triggers. The goal of mechanical trading is to be as unbiased as possible in your assets and positions. Emotional trading is one of the easiest ways to cloud rational investment decisions. Successful trading strategies incorporate plans based on factors such as those active investment managers apply. 

How Mechanical Investing Works

Mechanical investing is a relatively broad topic, encompassing multiple different strategies. You can use the example of dollar-cost averaging to describe mechanical investing. At any rate, technical analysis should always accompany your mechanical trading strategy. 

Whether 50-day, 200-day, or other periods, moving averages can serve as triggers for mechanical traders to buy or sell assets. Other popular signals that mechanical investors can use are other indicators such as the Relative Strength Index (RSI) or the Moving Average Convergence Divergence (MACD). 

Behavioral Biases and How to Avoid Them


Avoiding overconfidence comes down to two components: placing too much faith in your information and placing too much confidence in your ability to act on that information at the correct time. Overconfident traders trade at higher frequencies and they tend to fail at diversifying their portfolios. 


Everyone has experienced this at some point, either with FOMO or their hindsight being 20/20. You either pass on a trade that makes a lot of money, or you stay too long in a failed position you should have seen coming. 

Humans try to avoid regret as much as possible. We often go to extreme lengths to avoid regret and we might restrict ourselves from potential trades due to this fear. 

Limited Perspective 

With so many stocks and assets to choose from, where do you turn? Humans are constrained by their own limited perspectives- we only have access to the knowledge we accumulate. Thus, instead of making the most efficient choice, we often choose the one that satisfies us according to our subjective desires. 

Chasing Trends 

One of the easiest trading biases to fall victim to is chasing trends. We tend to detect patterns and uncover meaning from those patterns. The market is more erratic than investors like to admit, and it’s easy to see why investors fall victim to these patterns.  

Mechanical Trading Tips 

Set the Timeframe

Mechanical traders stick to the timeframes they designate at the beginning of their position. You have to decide what times you’re comfortable with while trading and the risk levels that accompany those times. If you’re a day trader, stick to day trades. If you’re a long-term trader, stick to long-term trading patterns. 

Select Indicators 

After setting the timeframe, you can designate the indicators you want to use. Whatever indicators you use, you need to define their purpose in your investment strategy clearly. You should use moving indicators and a great rule of thumb is to incorporate a fast-moving indicator and a slow one, though this depends on your strategy and time frames. 

Risk Assessment

Systems are inherently flawed and you must understand the risk level you’re willing to tolerate before committing to a trade. 

Entry and Exit Points

Defining your entry and exit points is another potentially stressful component of mechanical trading. You can use all of the technical analysis at your disposal and still wind up flat on your face. However, defining entry positions and exit positions will mitigate some of the risks involved in your trades.

Common Pitfalls When Developing a Mechanical Trading System

Just like a continuously profitable mechanical system requires a human element to stay ahead of the game, so too does a system need the human element during its development phases, and this is where problems can creep in.

Common pitfalls when developing a new mechanical trading system include:

  • Not being experienced enough in programming.
  • Not knowing what exactly it is you want to achieve with your new strategy.
  • Continuously fiddling around with your indicator parameter or rules to try and find the “perfect” setting or result.
  • Backtesting your strategy to death and when it doesn’t yield the results you expected, you change some more parameters OR even worse you see unrealistically good results and think you’re a genius.
  • Not backtesting your strategy over a long enough historical period i.e. testing a couple of months results is not the same as testing a strategy’s performance over a year or more.
  • Not giving any consideration to drawbacks or losing streaks and how they would affect you emotionally when they occur in real life.
  • Once development is over and the backtesting results are in, traders rush to trade with real money instead of going through simulation mode.

These are a few major pitfalls and they all stand in the way of what could go wrong with the successful development of a mechanical system and why so many systems fail in the first place. Of course, anyone hoping to manually trade will also need to learn to manage the pitfalls of trading psychology.

After years of trading, I have found that a combination of discretionary trading and some elements of rules-based mechanical trading, works the best when they are used in a strategy that adapts to price action and market structure.

Trading Within Market Structure

Market structure can be seen as dynamic in nature, meaning that the price action on the right-hand side of your screen is often the result or the cause of the previous market structure. One way to illustrate this phenomenon is to use techniques that expose the underlying geometry that is present in all markets in an attempt to find future areas of support or resistance by utilizing the previous market structure.

best mechanical trading system

One of the best recent examples of this is the major decline that Bitcoin experienced since the 17th December 2017. One market geometry tool that is heavily underrated, is the pitchfork and on the chart above I simply connected my Schiff pitchfork to 3 very important swings (black arrows).

Using those exact swings (previous market structure) it became possible to find the next major area of support when price touched the lower blue line (called a median line) and reversed upwards again. Price has since been moving to the upside, but look at where it struggled to break through, right at the upper blue median line.

Pitchforks, therefore, allow us to visually see that future major turns or swings are a function of the previous market structure.

Basing your trading decisions on only one drawing tool, like a pitchfork is not enough though but when used as part of a strategy, that is dynamic in nature, it becomes possible to take trades with minimal risk and large profit potential.

What I’m getting at is that when you know how to read market structure and price action it becomes possible to plan trades, often ahead of time which is something that a fully automated mechanical trading system cannot do.

mechanical trading

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The Exponential Profits System (EPS)

After years of development and fine-tuning I have developed a strategy that aims to execute one specific goal:

Finding the end of corrections within a trend and entering positions once the trend resumes again.

That goal might sound simple but to successfully pull it off requires a strategy that can be broken down into manageable steps that involve both discretional and rules-based trading.

What follows will be a few examples of trade setups that were taken with minimal risk that resulted in massive profits, all by following a strategy that can be learned and applied successfully by anyone that is willing to put in the time and effort.

The benefit of using a system such as the Exponential Profits System is that you get to learn and understand how markets move and why they move. It also builds confidence in your own abilities as a trader, teaching you how to fish for yourself.

Next, I will show you some recent trades that were planned ahead of time, allowing me enough time to prepare myself for an entry without the stress of being glued to my screen all day long. Pulling off trades like the ones below is a very liberating experience, which I doubt, no expert advisor or automated mechanical system for sale on the web today can give you.

Recent EPS Trades


mechanical day trading strategies

I have been tracking a correction in the USD/CAD pair since the 13th of February 2018 and identified a trading zone from where I expected that correction to end. Keep in mind that I analyzed and planned this trade ahead of time.

the best mechanical day trading system i know

Following a set of rules-based entry conditions (which could be programmed), I entered a trade at the exact low of that correction and made my final target 17 days later. Not only were my entry rules-based, but I managed my open position with rules as well, allowing me to take partial profit on the way up while trailing my stop loss.

Crude Oil

best mechanical forex trading system

Towards the end of January 2018, I had my eye on Crude Oil and identified two possible zones where I expected a reversal from. In this case, the price moved through my upper price zone without my rules-based entry conditions signaling me to take a trade. I only got a trading signal at my lower price zone.

best crude oil trading system

Entering a position within my lower entry zone allowed me to take a partial profit of 176 ticks while only risking 15 ticks. In this case, price never reached my final target but I got stopped out on my trailing stop with additional profit.


aud usd trading strategy

Here’s another example of a trade forecast done on AUD/USD around the 21st December 2017.

aud usd trading forecast

Again the EPS strategy managed to find the exact low of that correction before it shot up and reached my target.


The Exponential Profits System continues to perform well under all market conditions and does not put all its trust in a mechanical system that needs continuous work to obtain a slight edge.

For those traders that want to learn how to trade for themselves and understand the underlying forces that move markets, then be sure to check out my course here.

Learning how to trade for yourself and developing a good “feel” for any particular market is what successful trading is all about. If you want to go down the road of programming your own mechanical system, expert advisor, or trading robots then by all means go for it, just make sure that you test your strategy properly both historically and in real-time before you take the leap with real money.

Until next time

All the best

Richard K


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