Profiting from the forex markets: An introduction to mechanical trading systems

Let me tell you a little about what I do. I am a full time currency trader, who runs various mechanical trading systems alongside each another. I spread risk across around a dozen mechanical systems simultaneously so that I am never too exposed to the failure of any particular system.

I only use 100% mechanical systems, most of which run through the MetaTrader platform in the form of Expert Advisors. I use mechanical trading systems for a number of reasons. Firstly, they eliminate human error. Secondly, they take up much less of your time. Thirdly, they can be backtested over a substantial period of time and various market conditions in order to check their validity.

Right now, I am running 5 systems that I have had made specifically for myself. These are systems that I have designed myself and had programmers build for me. These systems form the lower risk part of my overall strategy, trading over longer time frames and riding long trends. As you can imagine, these have done very well in the conditions we have seen coming into 2009. These systems are generally lower risk but also will never make the outrageous returns that intra-day trades can. They are my "insurance" to make sure that I am still profitable overall.

I am also running 6 systems that I have purchased, although I have bought many more than this. I bought these systems to form the higher risk part of my portfolio. When I purchase an intra-day trading system, I generally will give it around a month on a small portion of funds and then give it a share of the portfolio if I can see that it is working. Many have been cut at this stage but I just see this as a cost of doing business and with the size of my fund, it is not too much of a problem.

I adjust the portion of the portfolio that each system has according to it's performance. Right now my long-term systems have an allocation of around 60% of the fund. This is quite high due to their superb performance in the second half of 2008, although it would never be less than 50%.

The remaining 40% of the fund is split between 6 systems that I have purchased over the last 18 months. Since I cannot review all six of them, I will tell you in detail about the two systems that have performed best for me, each of which have a share of 10% in the fund.

The first system is called "Forex AutoPilot". Forex AutoPilot (FAP) is one of the original trading systems to hit the retail market and is still the most popular and considered to be the most effective on the scene. The fact that it has been around for the length of time that it has is a testament to the system. However, a new version of the system has recently been released, called FAP turbo. I purchased this update as soon as it was available and I have been really pleased with the work that they have done on it.

Let me start by talking about the experiences that I had with the original FAP. When I originally purchased it, it was actually the first system that I had ever bought. I was still trading manually at that stage. I set it up with only a small amount of funds and pretty much just left it. When I checked it after a day, it was down a couple of percent. I almost gave up on it immediately. However, I stuck with it and I am so glad that I did.

One thing that I have learned about system trading is that every system will have losing trades and losing days, no matter what they may tell you on the sales letter. The thing that you have to achieve is to find one that is a winner in the long term. That is where FAP really stands out from the others. If you look at daily data for the system, it appears to not be any better than any other. It has losing days and sometimes even has losing weeks. However, I have never had a losing month with FAP. Looking at the monthly returns for the system, they are often over 50% and have on occasion gone over 100%. Don't get me wrong, they have been close to zero on occasion, but the fact that they have never been negative is what has really impressed me about this system.

As good as FAP is, there is a new "version" which was released in November, called FAP Turbo. I have now been using this for over a month and whilst it is early days, I can say that I am very impressed with the latest version. They seem to have taken all of the very best parts of the old Forex AutoPilot system and really turned it into a more robust system. One of the key differences that people are talking about is that with FAP Turbo, the losing days occur with a similar frequency to the old system, but when they do occur they are much closer to break-even than before. I too have noticed this. For any geeks who are reading this, it appears that they have changed the risk management so that on days where you are down, they adjust downwards the risk per trade to take into account the unfavourable trading conditions that may be occurring on that day.

I am really excited about this new version of the system that has done so well for me. It really seems like they have done well in making this system even better. It is a little bit more expensive, (FAP is just under $100, FAP-Turbo is $149).

Whilst I am currently running both systems (FAP at 10%, FAP-Turbo at 5%), you probably don't need to unless like me you are looking to diversify for a large fund. If you are looking to buy just one of these two versions then I would certainly recommend going for the newer, updated version. Even though I love the old FAP, the new one just seems to have all the best features of the old one but with a more robust risk-management procedure and is probably even less likely to ever have a large blow-up.

For me, the FAP series of products gets 5/5.

The second product that I will review is a system that is also currently commanding 10% of the fund, called Forex Funnel. This product is also an Expert Advisor that you can put straight into MetaTrader and leave it to work.

When I first purchased this EA, it performed well almost instantly. However, it is a little different from the FAP series of products in that it does have losing months. When it does win it tends to win pretty big, but it can have some months in which it loses pretty heavily. This extra variance is not really a good thing, although it is ok as long as you don't mind occasional draw-downs on your account.

I actually moved this system up to a 10% allocation pretty recently after it enjoyed a good period, although it has struggled a little since then. One possible disadvantage of this system is that it only trades on the USD/JPY currency pair. This can leave it a little vulnerable to adverse conditions in this market, whereas the FAP products are suited to all the major pairs.

I do, however, think that the Forex Funnel has a lot of potential. The fact that it is overall a profitable system already puts it ahead of 90% of the other systems available. I think that maybe there could be some work done on the risk management aspect of the system in order to try to reduce some of the losing streaks.

Even though I may move Forex Funnel back down to a smaller share of my fund in the future, this product is generally pretty good and I could recommend it to anyone who has a high tolerance for risk and/or does not feel that Forex AutoPilot is for them. Overall I would give it a generous 4/5. It retails for just under $140, which is a good price, although for just a little more you could get FAP-Turbo, which is probably a better product.

I hope that you have enjoyed this article and that you have learned something about the way I run my fund. Remember, mechanical systems are only one way to go, but in my opinion it is the best way. Remember to always pay attention to your risk and diversify where you can.

If you want to learn more about the original version of Forex AutoPilot: CLICK HERE

If you want to learn about the new version, FAP-Turbo: CLICK HERE

If you want to learn more about Forex Funnel: CLICK HERE

Thanks for reading this post, I hope you found it interesting and that it will help you in your journey to becoming a successful forex trader.

Happy Trading!!

Chris