# Discretionary vs. Mechanical Trading



## tech/a (21 March 2006)

*Well thats incredible.*

I cannot find 1 credible/verifyable piece of evidence in the closed thread on this topic that advances the initial argument that discretionary trading is consistantly profitable.

Wayne I dont want or expect you or *ANYONE ELSE* who would like to give a decent demonstration of discretionary trading to disclose their methodology.

Simply Buy here and or stop there and or exit if this happens.

You know the single most common reason for people not posting a continuous trade log is the embarrassment of making a loss.
_I'd post one myself but you could lay odds that if it made a loss I'd be accused of tampering with the discretion!_

I say who cares if it wins or loses (On a personal level).
On an *EDUCATIONAL/DISCUSSION * level it has the potential of being highly rewarding to those who take part---wether positive in learning how to trade profitably *CONSISTENTLY* in a discretionary manner or ways to improve perhaps something you do now.

*No wonder people dont want to post a live trade log----Look at the crap I get and mines highly profitable----imagine the bollicking I'd be getting if it made a loss. (Which of course most would prefer!)  *

Come on people how about posting some content!
This is an important topic as its how most trade and how most lose their capital in the longer term.


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## Bobby (21 March 2006)

*Re: Discretionary V Mechanical Trading*



			
				tech/a said:
			
		

> *Well thats incredible.*
> 
> I cannot find 1 credible/verifyable piece of evidence in the closed thread on this topic that advances the initial argument that discretionary trading is consistantly profitable.
> 
> ...




Hullo Tech,

I trade discretionary with my own methodology, sometimes I stuff up, well thats happening more now .
I think its the manipulators that do this to me, but there maybe something else  .

Trade from home & get too many people dropping in just when I need solitude & lose the plot  

Bob.


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## It's Snake Pliskin (21 March 2006)

*Re: Discretionary V Mechanical Trading*



			
				Bobby said:
			
		

> Hullo Tech,
> 
> I trade discretionary with my own methodology, sometimes I stuff up, well thats happening more now .
> I think its the manipulators that do this to me, but there maybe something else  .
> ...




I get sidetracked with Kiss dvd`s and my guitar, japanese studies and all other daily life crap. I need an igloo or something.  :band


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## markrmau (21 March 2006)

*Re: Discretionary V Mechanical Trading*

Tech, what is your definition of dicretionary trading?

It sounds to me that Nick R trades in a somewhat discretionary manner. While NR sets a stop and a target for each trade (and hence has a prior risk reward expectancy), he has no qualms about about exiting a winning trade early or letting it run (stops are fixed though).

Look at NR's reply to Sam's question:
http://lightning.he.net/cgi-bin/suid/~reefcap/ultimatebb.cgi?ubb=get_topic;f=25;t=000139;p=2

The point is that he updates his percentages after each trade, and if something is amiss, he works out why - to me this is discretionary.

I think everyone is getting 'all het up' over what is infact relatively minor differences in trading styles. We are all trying to do the same thing - let winners run and quickly cut losers. This can be achieved within both a purely mechanical and partially discretionary frameworks.


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## wayneL (21 March 2006)

*Re: Discretionary V Mechanical Trading*

Tech

Just so you know, I won't be participating for the following reasons:

1/ This has now become an acrimonious topic and I have no intention of fanning the flames further.

2/ As stated before, I am primarily concerned with maintaining my psychology. Posting trades live, apart from the odd spi trade, I am not interested in. For me to do that, it would be contingent on me to unfailingly and religiously post the next 1000 trades. I just don't care to do it, and it is not important to me to prove I am profitable to people I have never met.

In case you missed it. I don't have a challenge with mechanical systems or your system in particular. I have it archived for future reference, in case my circumstances ever change. Like buying or starting a separate business for instance. I regularly refer friends of mine to have a look at your work. I will also continue to do so despite whatever opinions I may hold of the online persona of Tech/a. I am on record on several fora as saying exactly that.

Now I can't get any plainer than that can I? I am not critisizing your method! I do not want it to fail!

However I will repeat, it is not suitable for me at present. I am satisfied with what I am doing. 

'nuff said!!!

On a further matter for all. As moderator, and bearing in mind the recent history of this topic, I will not stand for any acrimony in this thread and that includes myself. I will ruthlessly edit any hint of the same. I know I have Joe's support in that endeavour.

So please, good discussions all.

Cheers


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## It's Snake Pliskin (21 March 2006)

*Re: Discretionary V Mechanical Trading*

What works for one trader may not work for another. Why? Psychology, and comfort, risk aversion levels are different.

A system doesn`t have to be computerized, mechanical or discretionary. It can be what works for the psychology in question. Get it right, your head sorted, and you are there as long as you have a system to trade. 

Why have a system? To help a trader to make trades, much like a blue print or set of guidelines. (Once again depending on your head)

What is the common goal? Ultimately to be profitable. To what extent is up the the persons in question. This is where the discretionary vs mechanical debate comes into question. Matching two different approaches to different psychology cannot be adequately tested for definitive conclusions regarding the debate.


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## It's Snake Pliskin (21 March 2006)

*Re: Discretionary V Mechanical Trading*



> You know the single most common reason for people not posting a continuous trade log is the embarrassment of making a loss.




I don`t think that is the case.
I would say most don`t know where they are at which may lead to some having this view. :alien2:


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## Bobby (22 March 2006)

*Re: Discretionary V Mechanical Trading*



			
				Snake Pliskin said:
			
		

> I get sidetracked with Kiss dvd`s and my guitar, japanese studies and all other daily life crap. I need an igloo or something.  :band




Hi Snake,
Yep getting sidetracked sure can stuff your trading, thinking of locking my outer gates in the day with a sign !.

Had a tourist enterprise a few years ago, one day a young japanese girl came in & we got on, so she helped me out for the next few days being paid for her efforts.
Well we got real friendly  I found her wonderful even though we had a language problem.
Got to ask you , do they like the western male in Japan ?

Bob.


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## It's Snake Pliskin (22 March 2006)

*Re: Discretionary V Mechanical Trading*

Here is an interesting link to someone who knows a lot about trading and is very reputable.
http://www.mastermindforum.com/phorum/read.php?f=9&i=13096&t=13055

I like the part about software.....

Bob,

Did the bizzo heh..nice.
I like Jap women. A lot like western men, but some don`t so that is ok too.
Snake


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## Bobby (22 March 2006)

*Re: Discretionary V Mechanical Trading*



			
				Snake Pliskin said:
			
		

> Here is an interesting link to someone who knows a lot about trading and is very reputable.
> http://www.mastermindforum.com/phorum/read.php?f=9&i=13096&t=13055
> 
> I like the part about software.....
> ...




Snake,

love that term of yours  the bizzo, Ah ah ahaah, thats funny !.

Bob.


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## wayneL (22 March 2006)

*Re: Discretionary V Mechanical Trading*



> On a further matter for all. As moderator, and bearing in mind the recent history of this topic, I will not stand for any acrimony in this thread and that includes myself. I will ruthlessly edit any hint of the same. I know I have Joe's support in that endeavour.
> 
> So please, good discussions all.




Duc, Tech,

I have dropped it, I am asking you once again, nicely.... please move on.


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## tech/a (22 March 2006)

*Re: Discretionary V Mechanical Trading*

Happy to do so.
But before I do would like an apology re the claim that my statement about discretionary trading was/is BS.

You've chosen to use censorship as your means of retort to our answers/evidence and opinions suppoting that infact the veiw is anything but BS.
If your not prepared to verify your statements then I personally want an apology.


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## wayneL (22 March 2006)

*Re: Discretionary V Mechanical Trading*



			
				tech/a said:
			
		

> Happy to do so.
> But before I do would like an apology re the claim that my statement about discretionary trading was/is BS.
> 
> You've chosen to use censorship as your means of retort to our answers/evidence and opinions suppoting that infact the veiw is anything but BS.
> If your not prepared to verify your statements then I personally want an apology.




Tech,

Your posts were deleted because they contained derogatory remarks. Pure and simple. I made it plain I would do so.

I won't censor any reasonable discussion without reference to individuals.

Please continue on.

Cheers


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## tech/a (22 March 2006)

*Re: Discretionary V Mechanical Trading*

Hang on.

You make a statement I refer to you the person who made the statement/s.
When I we refer to the person (and in future) any person to verify statements or check their statements or refute them then you delete posts.
Bulldust can sling inuendo and attempt to discredit and thats fine as it suits you?
You can call another posters comment BS and thats fine.

You cant have a set of rules for you and another for he rest of us.

Give me an apology you've handled this in a less than exemplory manner.
Then I"ll move on.


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## Joe Blow (22 March 2006)

*Re: Discretionary V Mechanical Trading*

I am happy for this thread to remain and for discussion on this topic to continue as long as participants refrain from personal attacks or making derogatory remarks about others. I am not naming any names or pointing any fingers as I did not personally see the posts in question, but if this thread is to continue the topic of discussion should be discretionary vs mechanical trading. There is no need to bring indivduals and their trading styles into it unless they volunteer that information themselves and make it a part of the discussion.

Please, lets keep it civil. Surely its not that hard.


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## tech/a (22 March 2006)

*Re: Discretionary V Mechanical Trading*

Think you better read the thread Joe and see where things were instigated.
Weve ALWAYS been on topic.
With Ducati's banning I really think someone has blown a fuse!!!

Still want the apology he was/is outa line.


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## wayneL (22 March 2006)

*Re: Discretionary V Mechanical Trading*



			
				tech/a said:
			
		

> Think you better read the thread Joe and see where things were instigated.
> Weve ALWAYS been on topic.
> With Ducati's banning I really think someone has blown a fuse!!!
> 
> Still want the apology he was/is outa line.




That's another personal inference Tech, please, keep to the topic. If you really want to vent, go to PM. 

Cheers


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## Joe Blow (22 March 2006)

*Re: Discretionary V Mechanical Trading*



			
				tech/a said:
			
		

> Think you better read the thread Joe and see where things were instigated.
> Weve ALWAYS been on topic.
> With Ducati's banning I really think someone has blown a fuse!!!
> 
> Still want the apology he was/is outa line.




Tech,

The initial thread was started by Wayne and made reference to remarks made by yourself but subsequently the thread turned excessively personal and was closed. This new thread was opened and Wayne indicated that he *did not wish to participate or be involved in the discussion*. Now from that point, for him to be brought into the discussion by others, is both provocative and, in my view, unacceptable.

Ducati has now been unbanned but as I said, I expect discussion in this thread to remain on topic and do not want it to turn into a repeat of the other thread.

If you honestly feel that an apology is owed to you then I suggest you contact Wayne by PM and settle it off the forums.


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## It's Snake Pliskin (22 March 2006)

*Re: Discretionary V Mechanical Trading*



			
				Snake Pliskin said:
			
		

> Here is an interesting link to someone who knows a lot about trading and is very reputable.
> http://www.mastermindforum.com/phorum/read.php?f=9&i=13096&t=13055




From the link:
 "This system fits me and my schedule. It's also very profitable. I understand it very well. *It's too discretionary to test*, so I keep track of my R-multiples and expectancy in real time". :alien2:


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## ducati916 (22 March 2006)

*Re: Discretionary V Mechanical Trading*

*tech/a* 

Your PM box is full baby...........empty some out!

jog on
d998


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## Milk Man (22 March 2006)

*Re: Discretionary V Mechanical Trading*

:jerry 

A picture paints a thousand words.  

C'mon, how different is using mechanical or discretionary within pre-defined parameters? Its not a willy measuring contest (in which case I would most certainly win anyways). Anyway, everyone knows that to trade successfuly you have to consult with the phases of the moon and rub your belly with snake oil!


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## ducati916 (22 March 2006)

*Re: Discretionary V Mechanical Trading*

*Snake* 

In regards to your link;



> The reason to do a lot of testing is to get you to the point where you are confident about what you are doing. However, I can probably find something to critique on every test you'll ever do.




I agree.
However I also maintain that doing nothing, is worse.



> Most software that tests is totally unreliable, but you just have to do the best you can do.




But it is improving.
However, it is not really the software that is the weak link, it is the person using the software. 



> And the more you understand how your concept works and what to expect from it in all kinds of market, the less you'll have to do testing it.




Unfortunately, this is just nonsense.
By understanding what to expect from your methodology, you logically must have analyzed results of numbers of trades over a time period.
That is TESTING.
Whoever wrote this was not someone who knows a lot about trading.



> Yes, I use an efficiency algorithm to screen...but I don't buy something because it has an efficiency of 14.31. Instead I buy it because I like the look of it.




But notice the order of execution;
First he screens (mechanically, via an algorithm) this is OBJECTIVE
Then he eyeballs.......DISCRETIONARY, or subjective.
The Objective, overides the Subjective.
His entire thesis, is nonsense.


> 2) I'll have a number of exits but will use 25% of the price to determine 1R. Other exists include trendlines, support areas, etc. I'll adjust my stops every weekend. I'll also exit if I find a stronger stock or the efficiency drops below 10.




Mechanical exit criteria.
Subjective which one is selected.



> 3) If the market is 70% positive efficiency and 30% negative efficiency, then I want to be 70% long and 30% short.




100% systematic, or mechanical.



> This system fits me and my schedule. It's also very profitable. I understand it very well. It's too discretionary to test, so I keep track of my R-multiples and expectancy in real time.




Although you would need a "systems guy" to confirm, I suspect that this statement is total nonsense as well. The scan will quite possibly throw up consistent types of chart patterns, that could be coded, and tested.
The exits could easily be tested.

jog on
d998


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## It's Snake Pliskin (22 March 2006)

*Re: Discretionary V Mechanical Trading*

It`s by Van Tharp.

But I guess you will disagree with anyone, so I have noted your thoughts.


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## ducati916 (22 March 2006)

*Re: Discretionary V Mechanical Trading*

*Snake* 



> It`s by Van Tharp.




Excellent.



> But I guess you will disagree with anyone, so I have noted your thoughts.




Nothing could be further from the truth.
However for me to agree, they must present something that provides evidence of thought.

jog on
d998


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## It's Snake Pliskin (22 March 2006)

*Re: Discretionary V Mechanical Trading*



			
				ducati916 said:
			
		

> *Snake*
> 
> 
> 
> ...




 :dunno: 

Ok.


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## wayneL (23 March 2006)

*Re: Discretionary V Mechanical Trading*



			
				tech/a said:
			
		

> Happy to do so.
> But before I do would like an apology re the claim that my statement about discretionary trading was/is BS.




Tech,

This whole disagreement has arisen, I believe, from different understandings of what is meant by "discretionary trading".

I have scoured the web for a definitive description of "discretionary" trading, and I can't help now thinking - "No wonder!"

One definition is that a disc. trader basically enters and exits on whims, gut feel, tips, brokers recommendations etc. Well that certainly is discretionary! If you were refering to that sort of trader exclusively, then I can agree with your comments about not knowing whether they have a profitable method. 100%!

Another definition of a discretionary trader, and closest to my view at the time this started, is this:



> Whereas mechanical trading uses a fixed set of rules to determine trade timing and direction in a systematic if this, then that fashion, discretionary trading is not confined in the same manner. The difference is in the fact that the discretionary trader does not always make the same interpretation of a market indicator (chart, technical study, fundamental information, etc.), or use it in the same fashion each time it is applied. He/she uses his/her own judgement to determine the value of that indicator at the given point in time.
> 
> From the perspective of Technical Analysis, the classic example of a discretionary trader is one who uses chart patterns to make trading decisions in a visual, nonalgorithmic fashion. This type of trader seeks patterns in the charts and tries to determine what they mean given the market situation.
> 
> ...




I call this discretionary, because a trend line is subjectively drawn...a signal is just this crossing that, and is a pure mathematical contruct to be interpreted as I see fit at the time...and so on.

The expectancy calculation can still be applied in this case, as a technical stop is applied, a trailing stop or target is selected. This expectancy is extrapolated forward based on past data. This is always the case whether the expectancy is calulated on past performance, or backtests.

Is that still systematic? I don't know... pass on that one. I regard it discretionary and that is the basis of my comments to you.

A simple and understandable misunderstanding really. We really aren't so far apart in our thinking, perhaps just in the expression of it.

Tech, I have no hard feelings, and hope we can move on from this.

Cheers


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## It's Snake Pliskin (23 March 2006)

*Re: Discretionary V Mechanical Trading*



			
				ducati916 said:
			
		

> *Snake*
> 
> In regards to your link;
> 
> ...




Rock on!
Snake


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## tech/a (23 March 2006)

*Re: Discretionary V Mechanical Trading*

Well now we have *discretionary trading * clearly defined.
So those trading in a discretionary manner will be able to identify with that.

They have no idea whether they will/can/or could ever hope to be longterm profitable.
Similar to buying a business and having no idea wether the product or service you are delivering is priced correctly,or in demand,seems like a great idea to you but that doesnt mean it is to anyone else.
Had a mate open an exclusive wine distributorship.He loves his wines and knows everything there is to know about wines.Few share his passion and it cost him $250,000 to find that out.

*Systematic traders* have a plan they have points of reference,proven (to them at least) start finish and risk strategies. They have a fair idea that they can get a profit from their trading,how consistant that can be over a long period of time they dont know,they can guess but they dont know.These types of traders can be profitable. However most would not be willing to trade their lifes savings on their systematic approach.Its seen as sexy as you can define and show relevence to profitable trades and most turn a blind eye to the importance of the losses.

Like buying a business knowing you have a demand and a potential profit and then putting everything you own on it. Done this myself both in Business and trading.Business overheads were at one time mis judged and interest rates blew out---business nearly sent me broke. Trading had some great wins but losses slowly made the great wins to far apart. No confidence to place decent capital on trades.


*Mechanical traders* Not sexy no longer rely on "Accuracy" of analysis
Accept both profit and loss within those parameters returned from as exhaustive testing as they have the capability of doing. No necessity to take every trade as regardless of trade taken in any universe at anytime the expected return will fall within those parameters. (This can be found through Montecarlo analysis). Certaintly dependant on ability of systems designer and software and their understanding of what it is that a Mechanical trading method enables. (Purely mechanical is when everything is executed by a mechanised trading platform). greater confidence as you can determine at anytime where your trading is relative to the "Blueprint",more confidence to plough more into your business.

Like having a business with a cashflow projection and your accountant next to you giving you weekly P/Ls and relating that back to your Cashflow report.
Then watching your balance sheet to ensure business growth.
Have traded and conducted business and property like that for some years----never looked back!

Trade as you wish but thats the explainations of how I see most traders trading. Sure there maybe hybrids.

I trade mechanically after trading with arguable success in the first 2.
Id rather make $XK a week slow and boring than fast and flashy,and not knowing whether I may drop it all again next week.


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## It's Snake Pliskin (24 March 2006)

*Re: Discretionary V Mechanical Trading*



			
				tech/a said:
			
		

> Had a mate open an exclusive wine distributorship.He loves his wines and knows everything there is to know about wines.Few share his passion and it cost him $250,000 to find that out.




Target market, positioning.....Most don`t know.



			
				tech/a said:
			
		

> *Systematic traders* have a plan they have points of reference,proven (to them at least) start finish and risk strategies. They have a fair idea that they can get a profit from their trading,how consistant that can be over a long period of time they dont know,they can guess but they dont know.These types of traders can be profitable. However most would not be willing to trade their lifes savings on their systematic approach.Its seen as sexy as you can define and show relevence to profitable trades and most turn a blind eye to the importance of the losses.




Yes the importance of the losses is very important. Testing in realtime, that expectancy equation, sobers you up.



			
				tech/a said:
			
		

> Like buying a business knowing you have a demand and a potential profit and then putting everything you own on it. Done this myself both in Business and trading.Business overheads were at one time mis judged and interest rates blew out---business nearly sent me broke. Trading had some great wins but losses slowly made the great wins to far apart. No confidence to place decent capital on trades.




Drawing an anology of, what one considers a normal business with overheads and rent etc, is not accurate to the plight of traders. The business conditions are different to the extent you can`t compare apples and oranges. A trader only needs capital to start with. They don`t even have to do it full time so can work for a normal salary.



			
				tech/a said:
			
		

> *Mechanical traders* Not sexy no longer rely on "Accuracy" of analysis
> Accept both profit and loss within those parameters returned from as exhaustive testing as they have the capability of doing. No necessity to take every trade as regardless of trade taken in any universe at anytime the expected return will fall within those parameters. (This can be found through Montecarlo analysis). Certaintly dependant on ability of systems designer and software and their understanding of what it is that a Mechanical trading method enables. (Purely mechanical is when everything is executed by a mechanised trading platform). greater confidence as you can determine at anytime where your trading is relative to the "Blueprint",more confidence to plough more into your business.




I can`t disagree here, though that blueprint must be bias free. Then there is the psychological aspect of second guessing it and tampering with it. Something experience will help with.



			
				tech/a said:
			
		

> Like having a business with a cashflow projection and your accountant next to you giving you weekly P/Ls and relating that back to your Cashflow report.
> Then watching your balance sheet to ensure business growth.
> Have traded and conducted business and property like that for some years----never looked back!



 :aus:


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## stevo (24 March 2006)

*Re: Discretionary V Mechanical Trading*



> * Adaptiveness: Mechanical trading systems are, for the most part, not very adaptive to changes in market conditions. The discretionary trader, however, does not have the problem. As markets shift, the trader has the ability to alter the way he or she derives and or interprets the analysis used to make trading decisions.




I would contend that a mechanical trading system can be designed (and already have been)  to be adaptive to market conditions. Certainly through monitoring various indices it is possible to alter the way a system trades, or even switch strategies to another system. A system can also be designed to monitor it's own equity curve and alter strategy based on what this curve is doing. 

As yet I can't get my systems to talk with my hairdresser, read the Financial Review, or look at the stars for some clues, but who knows! The challenges for mechanical traders is to utilise accurate relevant data to construct, through a testing methodology, robust profitable trading systems taking into account market conditions, as well as specific stock performance and liquidity. 

regards

stevo


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## Nick Radge (6 April 2006)

*Re: Discretionary V Mechanical Trading*

I'm not going to take anyones side because I do both. However, here is my futures index trading system that is 100% mechanical. These are *real* trades - all 430 of them since Mar 03 and its a *real* equity curve. It trades long and short in equal amounts, so bullmarket or not its done well.  It includes comms and real slippage.


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## professor_frink (6 April 2006)

*Re: Discretionary V Mechanical Trading*

hi Nick, because you do both, how does the mechanical system compare with any discretionary systems you use?


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## Nick Radge (28 April 2006)

*Re: Discretionary V Mechanical Trading*

Sorry professor, I didn't see this question. My mechanical systems do better maninly because I am a poor discretionary trader by nature. I therefore allocate more funds to mechanical than discertaionary. I have a few friends who are quite amazing discretionary traders ($500k to $700k pa), although I do believe they have a method, albeit subconsiously. I simply do not have the personality or risk profile they do.

Its each to their own and whatever best fits one's personality. There is no right or wrong answer.


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## RichKid (28 April 2006)

*Re: Discretionary V Mechanical Trading*



			
				stevo said:
			
		

> ........
> 
> As yet I can't get my systems to talk with my hairdresser, read the Financial Review, or look at the stars for some clues, but who knows! .......
> regards
> stevo




ROFLAO!!! If it could hug you, cook and do the cleaning and household repairs too you wouldn't need a partner either, but then I'm sure there are other limitations ....


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## professor_frink (28 April 2006)

*Re: Discretionary V Mechanical Trading*

thanks for the reply nick


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