It certainly can't force you to stick to that plan but it does make it so you have to consciously decide to deviate from it. That alone can intimidate you enough to stick to it. Building, or using, an algorithm forces you think about the rules of your trading strategy before you put on the trade.
This is something all traders should do yet few accomplish.
When I started QiT, and before I started down the Yellow Brick Road that got me to where it is today, I was truly amazed at how many decisions had to be made before I was able to dissect my trading.
Let’s take, for example code a simple moving average crossover type of trade.You want to test if a a slower MA crossing over (or under) a faster MA is profitable - either long or short.
Here is a short list of decisions you have to make before you even consider entering a trade:
- 1What timeframe are you using? Daily? Weekly? Hourly?
- 2Which Market are you going to trade? Equities? Futures? Forex?
- 3Which moving average type are you going to use? Simple? Weighted? Exponential?
- 4Which averages are you going to use?
- 5How are you going to enter a position? Market? Limit?
- 6What criteria will you use to exit a position?
- 7How are you going to exit a position? Market? Limit?
- 8Will you use a Stop Loss or a Dynamic Stop?
- 9How do position size? What is your money management process?
These are some of the decisions you have to a make if you’re trading your own simple trading system and you don’t want to back test it.
If you want to back test it, there is an entirely new set of questions that need to be addressed well before you get to anything that resembles trading.