# Discretionary vs. mechanical trading



## Mr J (1 October 2009)

aramz said:


> Any reply from Tech A or someone else would be much appreciated as i've always wondered what is required to take discrentionary trades to the next level....Cheers




There's isn't really a next level, and skillful discretionary trading will outperform any system. Discretionary and mechanical have their strengths and weaknesses, and which is better depends on the trader. Not just in terms of performance, but also lifestyle.


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## tech/a (1 October 2009)

*Re: Example of my conservative trading strategy*



Mr J said:


> *There's isn't really a next level,*
> *and skillful discretionary trading will outperform any system.* Discretionary and mechanical have their strengths and weaknesses, and which is better depends on the trader. *Not just in terms of performance,but also lifestyle.*




Yes there is.
Well I haven't seen any that have demonstrated that they out performed T/Trader over the 5 yrs it was fully disclosed and active.IE 1200% over 5 yrs.
I would argue that the skilled systematic trader would have a far more leisurely lifestyle and likely more profit in the long run.


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## weird (1 October 2009)

*Re: Example of my conservative trading strategy*



Mr J said:


> There's isn't really a next level, and skillful discretionary trading will outperform any system. Discretionary and mechanical have their strengths and weaknesses, and which is better depends on the trader. Not just in terms of performance, but also lifestyle.




Don't think it is possible to generalize which outperforms. 

Lets add another term, systematic, but even to confuse things, lets say a trader doesn't look at individual symbols as anything more than OHLCV, which are 5 numbers, and the history of these numbers. So 2 additional terms, systematic and numbers. 

In Technical or Fundamental analysis, you could be non-systematic or systematic, but in T/A all you care about are the very real and actual numbers from OHLCV.

Can discretionary be systematic ? That's a more interesting question.

Benefits of purely mechanical ? You can quickly scan a large universe to have more opportunities than purely discretionary.

One-on-one, who is better as a result - don't care - find something that works for you.


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## nunthewiser (1 October 2009)

*Re: Example of my conservative trading strategy*



weird said:


> One-on-one, who is better as a result - don't care - *find something that works for you*.





wise words ...just because something works for someone else it does NOT mean it will work for you also 

at end of day it does not matter which way you trade , whatever style you use , whatever software one uses .if one cannot control there finances they may as well go home now.......


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## tech/a (1 October 2009)

*Re: Example of my conservative trading strategy*



> Can discretionary be systematic ?




Should be!
I would argue that those who are profitable certainly do trade Systematically in a discretionary manner to skew their numbers.


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## wayneL (1 October 2009)

*Re: Example of my conservative trading strategy*



tech/a said:


> Yes there is.
> Well I haven't seen any that have demonstrated that they out performed T/Trader over the 5 yrs it was fully disclosed and active.IE 1200% over 5 yrs.
> I would argue that the skilled systematic trader would have a far more leisurely lifestyle and likely more profit in the long run.




Techtrader is a great system, but again fooled by randomness. Techtrader benefited from one the the best bull runs ever. That great, kudos. But to expect that in other periods would be asking too much

But... lack of public results make it difficult to compare. Certainly more leisurely, that's true. Weird also has some interesting points.

With regards to "discretionary", it is never clear whether this is a pure gut feel thing, or a rule based decision process, but not mechanical.

Whenever we compare small sample sizes of traders, whether discretionary or mech, we are likely to be fooled by randomness. There are also numerous different goals from trading, wealth-building, income, a mixture of both... some people just want excitement FFS. Also numerous personalities and psychological strengths and weaknesses that suit different styles.

It comes back to "what works is real". Definitive and inflexible statements that x is better, or y is best are bullsh!t TBH. It all depends


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## tech/a (1 October 2009)

*Re: Example of my conservative trading strategy*



> Techtrader is a great system, but again fooled by randomness. Techtrader benefited from one the the best bull runs ever. That great, kudos. But to expect that in other periods would be asking too much




Wayne I couldnt agree more.

It was and is designed for exactly the period it traded in.Its a long only long term method.Now if I knew when the NEXT 5 yr bull run was coming Id have a few houses on it!
To expect a similar result in any other market(Than a longterm bull market) would be crazy.
But plenty lost over those 5 yrs and I reckon it outperformed most funds if not all.

*I'm happy to be fooled by randomness every now and then!*


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## weird (1 October 2009)

*Re: Example of my conservative trading strategy*

Hi Wayne,

I believe Tech/A applied a filter in real time to TT, to what he probably would have included in backtesting, if the historical data presented itself in the period.

From a mechanical trader point of view, I agree with Tech/A, the more a discretionary system can be made systematic the better, only because we can test with modern technology , i.e. a computer.

However some of these discretionary patterns are perhaps too complex ... and this complexity allows for many interpretations.

However, I do not doubt there are gifted folk, and also learned folk from hours of paper backtesting, and also lucky folk, that trade exceptionally well from discretionary trading.

I have an open attitude to these things, just not the time.


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## Mr J (1 October 2009)

*Re: Example of my conservative trading strategy*

You're taking my post out of context, probably my fault for not elaborating.



> Well I haven't seen any that have demonstrated that they out performed T/Trader over the 5 yrs it was fully disclosed and active.IE 1200% over 5 yrs.




That isn't even 100% per year. Great performance sure, but do you really think discretionary traders out there can't achieve better? I don't really want to go into this, as in my mind it is completely obvious why a great discretionary trader would outperform any system. All I will say that the human mind can analyse and adapt to whatever is happening. Any system requires rules, a trader does not. The trader can use all of his experience and knowledge to find opportunities a system cannot.



> I would argue that the skilled systematic trader would have a far more leisurely lifestyle and likely more profit in the long run.




I mentioned lifestyle for exactly this reason - some prefer automatic trading so they don't have to do much/any screentime. Now, which is more profitable is subjective, because we all have different capabilities and situations. Some people may require discretionary skills, others may lack the ability to program, others may lack discretionary skills and some will excel at producing systems.



			
				weird said:
			
		

> Don't think it is possible to generalize which outperforms.




I didn't. I said that it will come down to the trader, with the exception being that skillful discretionary trading will outperform any system. This is true, for now. I also intentionally mentioned system in the singular.



> Benefits of purely mechanical ? You can quickly scan a large universe to have more opportunities than purely discretionary.




Sure. Skillful discretionary trading is quality, while mechanical is quantity. Like I said, both have strengths and weaknesses, and obviously the ability to apply a mechanical system to many markets simultaneously is one of the strengths.



> One-on-one, who is better as a result - don't care - find something that works for you.




My point.



			
				WayneL said:
			
		

> With regards to "discretionary", it is never clear whether this is a pure gut feel thing, or a rule based decision process, but not mechanical.




I believe it is based upon rules we form subconsciously with experience.


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## lukeaye (1 October 2009)

*Re: Example of my conservative trading strategy*

thanks for everyones input, by the way. Im struggling to find the time to post anymore set ups or provide any more updates on what im doing at the moment, probably becuase i havent done everything, im looking into software that can help me with that. so far amibroker looks like the one everyone uses, and seems to be a fair price?


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## wayneL (1 October 2009)

*Re: Example of my conservative trading strategy*



tech/a said:


> *I'm happy to be fooled by randomness every now and then!*




Well, yes. So long as people aren't fooled by being fooled by randomness. (Not suggesting you are, but so many do).

A bloke having a great day at the races shouldn't be fooled that he is a genius punter. 

Continuing on in the theme of before:

Those of us trading for a living can't rely on mech systems. We have to know when to throw the "rules" in the bin and invent an entirely new and temporary set of rules to suit the current conditions.

No better example of that than recently.

BTW it's one of the reasons I like options. There are 101 ways to skin any cat.


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## lukeaye (1 October 2009)

*Re: Example of my conservative trading strategy*

Hi waynel,

Is there anything you can add constructive to any of my strategies, i dont want this to turn into another debate haha!


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## weird (1 October 2009)

*Re: Example of my conservative trading strategy*



Mr J said:


> I believe it is based upon rules we form subconsciously with experience.




No doubt with discretionary, that the subconscious takes effect 

One successful discretionary trader I know is able to verbalize his trades quite well, and if you watch over each trade, there is a pattern, so I would call that pretty close to systematic.

lukeaye is also appearing to be doing a pretty good job, and interested in his posts ...


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## wayneL (1 October 2009)

*Re: Example of my conservative trading strategy*



lukeaye said:


> Hi waynel,
> 
> Is there anything you can add constructive to any of my strategies, i dont want this to turn into another debate haha!




That probably would start another debate.  

I'm an options trader, The Greeks are more important to me than fine points on technical analysis. If I trade direction, it is for a swing. 

My big tip is - expectancy x frequency = bottom line


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## weird (1 October 2009)

*Re: Example of my conservative trading strategy*



wayneL said:


> My big tip is - expectancy x frequency = bottom line




Amen


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## lukeaye (1 October 2009)

*Re: Example of my conservative trading strategy*

yeah id have to agree with that two, but i want to be told things i dont know! haha thanks anyway. 

yeah i love my options too.


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## weird (1 October 2009)

*Re: Example of my conservative trading strategy*



lukeaye said:


> yeah id have to agree with that two, but i want to be told things i dont know! haha thanks anyway.




When being told or been given any information, the important , the really important, can never be said or repeated enough.

Anyway, will let this thread take it's course ... bol.


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## Mr J (1 October 2009)

*Re: Example of my conservative trading strategy*



lukeaye said:


> Hi waynel,
> 
> Is there anything you can add constructive to any of my strategies, i dont want this to turn into another debate haha!




That's asking for a lot, since almost everything about trading is debatable!



			
				Wayne said:
			
		

> Those of us trading for a living can't rely on mech systems




Why do you think that? I don't agree. Many ways to profit from trading, and I'm sure there are mechanical traders operating in many markets and quick timeframes that do far better than the average discretionary swing trader.



> so I would call that pretty close to systematic.




I completely agree. Our mind will naturally try to model the market, so completely discretionary trading is actually a very, very complex system. This ability to be complex is why it can potentially perform better than a simple 'mechanical' system, at least in terms of performance per trade. I say per trade as multiple mechanical systems can potentially be employed simultaneously across many markets, allowing for quantity to beat quality.


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## Wysiwyg (1 October 2009)

*Re: Example of my conservative trading strategy*



lukeaye said:


> im looking into software that can help me with that. so far amibroker looks like the one everyone uses, and seems to be a fair price?




If you are looking at coding your system to backtest then you will have to get/pay someone to code it or learn the Amibroker Formula Language and do it yourself.


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## lukeaye (1 October 2009)

*Re: Example of my conservative trading strategy*

i just bought the software, and now when i go to register it, windows gives me some error report, not happy! i have no clue what to do


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## weird (1 October 2009)

*Re: Example of my conservative trading strategy*



lukeaye said:


> i just bought the software, and now when i go to register it, windows gives me some error report, not happy! i have no clue what to do




As usual ask the folks you bought it from, I use AB, good support, ask em what's going on.


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## aramz (1 October 2009)

*Re: Example of my conservative trading strategy*

Thanks TechA for the in depth reply. Thanks to everyone else for offering some wise words to the thread i appreciate it.


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## wayneL (2 October 2009)

*Re: Example of my conservative trading strategy*



Mr J said:


> Why do you think that? I don't agree. Many ways to profit from trading, and I'm sure there are mechanical traders operating in many markets and quick timeframes that do far better than the average discretionary swing trader.




I should have clarified by saying long only trend trading systems.

I've no doubt there are mechanical algos on shorter time frames that work in extremely volatile markets as well, but I haven't figured one out. 

I'd love to see an example of one within the capabilities of a retail trader.


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## tech/a (2 October 2009)

*Re: Example of my conservative trading strategy*



> That isn't even 100% per year. Great performance sure, but do you really think discretionary traders out there can't achieve better?




So far yes. 
*I havent seen one* in 15 yrs anyone can post up a trade log by blog or any other means and let it run for 5 yrs.
Just let me know when you find one doing better than 100% a year.



> I don't really want to go into this, as *in my mind it is completely obvious* why a great discretionary trader would outperform any system.




You may find a mind check valuable.



> All I will say that the human mind can analyse and adapt to whatever is happening. Any system requires rules, *a trader does not.* The trader can use all of his experience and knowledge to find opportunities a system cannot.




The most flawed statement I have ever seen on any board.


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## Mr J (2 October 2009)

*Re: Example of my conservative trading strategy*



			
				Tech said:
			
		

> I havent seen one in 15 yrs anyone can post up a trade log by blog or any other means and let it run for 5 yrs.
> Just let me know when you find one doing better than 100% a year.




I don't know how you can think that. You saw what T/H did in his thread, so that's all that needs to be said. Most traders aren't going to post their figures, so just because _you_ haven't seen it, doesn't mean it doesn't happen. For me it is a given that discretionary traders can earn >100%. Of course, if you say it can't be done, then it can't.



> The most flawed statement I have ever seen on any board.




I'm honoured I could be the one to take the prize. By 'rules', I mean the firm rules a mechanical system will follow, such as always sell when the 20ma crosses down over the 50ma. My point is that while a discretionary trader may have that as a tactic, they will be able to ignore that trade if there's something about it they don't like.

I think in future I will spell everything out word for word, to try and avoid people taking words or phrases out of context, and jumping to conclusions that I never intended.


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## tech/a (2 October 2009)

*Re: Example of my conservative trading strategy*



Mr J said:


> I don't know how you can think that. You saw what T/H did in his thread, so that's all that needs to be said. Most traders aren't going to post their figures, so just because _you_ haven't seen it, doesn't mean it doesn't happen. For me it is a given that discretionary traders can earn >100%. Of course, if you say it can't be done, then it can't.




T/H showed 1 day which made $14k. This sent the Muppet's into a tail spin madly looking at how they could do the same.All of a sudden scalping was the "Ducks guts" and I should know! If you take the time to have a good look at *his scatter charts you'll notice something that stands out like Dogs Bullocks *and I pointed it out and he agreed so go have a look. I still haven't seen 100% + a year from any discretionary trader.The Duck included. Not saying it cant be done just that I haven't seen it.
Now if you were attending a seminar with this you beaut product that returned 100% a year *YOU* would simply just buy it because *YOU* believe it.

Now I maybe just a Duck but I think thats pretty silly.



> I'm honored I could be the one to take the prize. By 'rules', I mean the firm rules a mechanical system will follow, such as always sell when the 20ma crosses down over the 50ma. My point is that while a discretionary trader may have that as a tactic, they will be able to ignore that trade if there's something about it they don't like.
> 
> I think in future I will spell everything out word for word, to try and avoid people taking words or phrases out of context, and jumping to conclusions that I never intended.




Well I have found that those who are really good at discretionary trading will make a discretionary decision based on something that they know has a high probability of placing them on the right side of a trade.
Some if not most have the knowledge from a systematic approach.


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## wayneL (2 October 2009)

This topic has been split off from the "Example of my conservative trading strategy" thread https://www.aussiestockforums.com/forums/showthread.php?t=17426

(Thanks Joe )


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## doctorj (2 October 2009)

This has the potential to be a very good thread, can we all please make an effort to keep it on topic.


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## aramz (3 October 2009)

Radge's last year of discretionary trades returned 178% i think.


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## Temjin (3 October 2009)

Here are my 2 cents.

"Rule Based" discretionary traders heavily rely on intuition in their decision making process and are tend to be more adaptable to market changes than systematic traders. A conclusion made from the interviews in Market Wizard series found out that all interviewed traders who call themselves discretionary had some of sort rigid rules most of them when they trade, but are more flexible in changing them as they see suit. 

The disadvantage of being a discretionary trader is obviously the reliance on a person's psychological makeup, and also in their physical ability to keep up trading, as well as the amount of time needed to generate more profit through taking more trades. Backtesting would also be impossible since rules are never rigid enough. 

Of course, there are certainly plenty of successful discretionary traders out there and have been able to maintain an edge for a significant amount of time.

Systematic/mechanical traders have the pure advantage of automating their strategies through computer software and can completely eliminate the downside in execution errors (overriding trades) due to psychological biases. Of course, biases would still remain in determining whether the system is still working or not and may even sabotage their own systems by taking on discretionary trades.

Through automation, they could spend most of their time researching on new strategies that exhibit an edge and they can be added to their system and traded with little effort. The biggest advantage is in their ability to trade FAR MORE opportunities than a discretionary trader physically could. 

 i.e. have the ability to trade multiple systems on multiple markets. high frequency day-trading

Of course, there are no evidences to suggest that the strategies produced by mechanical system are any "better" (in terms of reward/risk ratio, or whatever measure you like to use) than discretionary ones. Whether the mechanical trading systems could adapt to market changes is highly dependent on the designer to exercise their own intuition. The key is to find an excellent system for generating and/or eliminating trading systems. 

I'm not suggesting that mechanical traders would generate more profit than discretionary ones, but the advantages/disadvantages of both type are clear. 

At the end of the day, like Van Tharp say, you trade on your own believe of the market. If you feel pattern recognitions and discretionary-style trading fits you more, then you shouldn't be forced to trade mechanically. 

I'm an engineer so I'm naturally more biased in mechanical trading systems.


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## Mr J (3 October 2009)

*Re: Example of my conservative trading strategy*



tech/a said:


> T/H showed 1 day which made $14k. This sent the Muppet's into a tail spin madly looking at how they could do the same.All of a sudden scalping was the "Ducks guts" .....I still haven't seen 100% + a year from any discretionary trader.The Duck included. Not saying it cant be done just that I haven't seen it.




Tech, I was just using that as an example since we all know of it.



> Now if you were attending a seminar with this you beaut product that returned 100% a year *YOU* would simply just buy it because *YOU* believe it.




Don't tell me what I what do, as you have no idea. I wouldn't be at a seminar, but if I was shown a system that has been shown to achieve 100% in the past, tested well over a live sample, and had sound methodology, then I would certainly consider it.



> Well I have found that those who are really good at discretionary trading will make a discretionary decision based on something that they know has a high probability of placing them on the right side of a trade.
> Some if not most have the knowledge from a systematic approach.




I've already talked about the difference between the rules a discretionary trader uses, and the rules a mechanical trader uses. Of course a discretionary trader has rules, and therefore a system. The difference is that a discretionary trader will choose when to ignore the rules. When I said a discretionary trader doesn't have rules, that was just a poor choice of words, and it seems to have stuck with you despite my subsequent posts.


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## bingk6 (3 October 2009)

Nice Post Temjin.

I also add that mechanical traders tend to perform a lot of backtesting of their strategies, which can give them some sort of instant feedback as to whether the stats that they have received are robust enough to commence trading a system.

Discretionary traders tend to paper trade, which on its own is not a bad thing, but it does take time, sometimes a lot of time. If the paper trading stats are not good, well back to the drawing board and then potentially more time spent in paper trading.

Mechanical systems are quicker off the mark. One can evaluate and choose from a number of alternatives very quickly.


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## skyQuake (3 October 2009)

Temjin said:


> Through automation, they could spend most of their time researching on new strategies that exhibit an edge and they can be added to their system and traded with little effort. The biggest advantage is in their ability to trade FAR MORE opportunities than a discretionary trader physically could.
> 
> i.e. have the ability to trade multiple systems on multiple markets. high frequency day-trading



This is so true, imo well worth the time to look into. Rather than sweating it out over a tick on the S&P or a small cap, that time could be better spent testing a new system.


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## wayneL (3 October 2009)

skyQuake said:


> This is so true, imo well worth the time to look into. Rather than sweating it out over a tick on the S&P or a small cap, that time could be better spent testing a new system.



Non Sequitur.

Discretionary, particularly rule based discretionary is not necessarily about small caps or ticks on the S&P.

Likewise, mechanical systems can be applied to small caps and ticks on the S&P.

There are differing personalities and trading goals.

Mech systems have their time and they have their place and suit certain people. Likewise discretionary.

I've heard it said that the average mech trader outperforms the average discretionary trader, but the better/top/elite (whatever term you want to use) discretionary traders outperform the better mech traders by miles.

I have no figures for that, but anecdotally I find that is the truth.

And once again I will post this little pearl from http://epchan.blogspot.com/2007/02/in-praise-of-day-trading.html



> Which brings me to day-trading. In the popular press, day-trading has been given a bad-name. Everyone seems to think that those people who sit in sordid offices buying and selling stocks every minute and never holding over-night positions are no better than gamblers. And we all know how gamblers end up, right? *Let me tell you a little secret: in my years working for hedge funds and prop-trading groups in investment banks, I have seen all kinds of trading strategies. In 100% of the cases, traders who have achieved spectacularly high Sharpe ratio (like 6 or higher), with minimal drawdown, are day-traders.*


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## Mr J (3 October 2009)

> I've heard it said that the average mech trader outperforms the average discretionary trader, but the better/top/elite (whatever term you want to use) discretionary traders outperform the better mech traders by miles.




I'd agree with this. Good discretionary trading obviously requires experience and skill, so it will be a liability for those with a low skill level, and a great advantage to those who are skillful. Some will argue that a mechanical trader can out-perform through quanitity (multiple systems, operating on multiple markets), but I'm guessing the guys who are paid 8-9 figures would be discretionary traders.



			
				skyQuake said:
			
		

> that time could be better spent testing a new system.




Maybe. There are so many roads a trader can take that it's impossible to say which is better for any specific trader. We all have different comfort zones, potential, methods etc. 

My comment about discretionary trading ultimately outperforming mechanical trading related only to those trading at a high level (i.e. the big-time traders) or on a performance per trade basis. I certainly wouldn't try to guess which is better on a general basis, and it's too bad I can't edit my original post to reflect this.


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## tech/a (3 October 2009)

Temjin said:


> Here are my 2 cents.
> 
> "Rule Based" discretionary traders heavily rely on intuition in their decision making process and are tend to be more adaptable to market changes than systematic traders. A conclusion made from the interviews in Market Wizard series found out that all interviewed traders who call themselves discretionary had some of sort rigid rules most of them when they trade, but are more flexible in changing them as they see suit.
> 
> The disadvantage of being a discretionary trader is obviously the reliance on a person's psychological makeup, and also in their physical ability to keep up trading, as well as the amount of time needed to generate more profit through taking more trades. Backtesting would also be impossible since rules are never rigid enough.




Flexible rules/psychological make up can and mostly do add up to disaster.
There is an implication that you need to trade more often in a discretionary manner to profit---Why?
While backtesting may well be impossible the reason and structure of a good discretionary traders method wont/shouldnt change---if they dont know what structure will (long term) trade after trade after trade return a profit then they arent trading they are gambling/mostly reacting to emotion.



> Systematic/mechanical traders have the pure advantage of automating their strategies through computer software and can completely eliminate the downside in execution errors (overriding trades) due to psychological biases. Of course, biases would still remain in determining whether the system is still working or not and may even sabotage their own systems by taking on discretionary trades.




While some automate most physically place the trade/s. *Bias should be removed*---the blueprint will clearly show whether the results found during the testing process are being reflected in live trading.
If they arent then there is only one question which needs to be asked.

Has the market changed significantly from the market/s used in the testing of the mechanical system being traded.Generally the system will clearly show this(as I found out when 3 of mine were fooled by randomness) by being exited out of all or most positions and finding less than average prospects.



> Through automation, they could spend most of their time researching on new strategies that exhibit an edge and they can be added to their system and traded with little effort. The biggest advantage is in their ability to trade FAR MORE opportunities than a discretionary trader physically could.
> 
> i.e. have the ability to trade multiple systems on multiple markets. high frequency day-trading




True continuous edge so compounding and leverage can apply.



> Of course, there are no evidences to suggest that the strategies produced by mechanical system are any "better" (in terms of reward/risk ratio, or whatever measure you like to use) than discretionary ones. *Whether the mechanical trading systems could adapt to market changes is highly dependent on the designer to exercise their own intuition.* *The key is to find an excellent system for generating and/or eliminating trading systems*.




Disagree strongly with this.Mechanical systems are designed to be proven wrong due to change in market conditions as explained above---not open or due to designers ability to read markets and use a discretionary skill!
That in Blue is one solution there are others.



> I'm not suggesting that mechanical traders would generate more profit than discretionary ones, but the advantages/disadvantages of both type are clear.




I dont know that they are (Advantages and disadvantages).
I think the discretionary trader like it or not needs the mechanical blueprint of his structure to KNOW if what he is doing is actually skewing his results in his favour or if in fact he has a disjointed string of trades which have no structure toward being profitable---he's gambling.



> At the end of the day, like Van Tharp say, you trade on your own believe of the market. If you feel pattern recognitions and discretionary-style trading fits you more, then you shouldn't be forced to trade mechanically.
> 
> I'm an engineer so I'm naturally more biased in mechanical trading systems.




I havent seen where Van Tharp has actually said that but to me its a cop out. Fits you more means? Sure you can be warm and fuzzy about patterns but trade 100 of them or any other discretionary signal in a disjointed jumbled fashion it will and has become very clear to many that a bias or feeling toward a particular trading idea placed into a loose strategy---becomes a pretty un comfortable "fit".


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## Wysiwyg (3 October 2009)

tech/a said:


> I havent seen where Van Tharp has actually said that but to me its a cop out. Fits you more means? Sure you can be warm and fuzzy about patterns but trade 100 of them or any other discretionary signal in a disjointed jumbled fashion it will and has become very clear to many that a bias or feeling toward a particular trading idea placed into a loose strategy---becomes a pretty un comfortable "fit".




It is in TYWTFF ... Chapter 2 -- Judgemental Biases: Why Mastering the Markets Is So Difficult for Most People.


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## skc (3 October 2009)

Is discretionary or mechanical trading more profitable?

Is Italian or Chinese cooking more tasty?

Is a Ferrari or a Lamborghini faster?

You get my drift...

I also believe there are macro discretionary elements to any mechanical systems. Just like there are mechanical / systematic elements in discretionary trading.


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## tech/a (3 October 2009)

Wysiwyg said:


> It is in TYWTFF ... Chapter 2 -- Judgemental Biases: Why Mastering the Markets Is So Difficult for Most People.




Well read from page 17 to 43 and I cant see it.
Doesnt sound like Van Tharp.
Would you be so kind as to point out the page and paragraph for me.
Id like to read it in context.

Thanks.


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## Wysiwyg (3 October 2009)

Temjin said:


> At the end of the day, like Van Tharp say, you trade on your own believe of the market.







tech/a said:


> I havent seen where Van Tharp has actually said that but to me its a cop out. Fits you more means? Sure you can be warm and fuzzy about patterns but trade 100 of them or any other discretionary signal in a disjointed jumbled fashion it will and has become very clear to many that a bias or feeling toward a particular trading idea placed into a loose strategy---becomes a pretty un comfortable "fit".




There are other places he mentions that we don`t trade the market, we trade our belief about the market.This is the paragraph word for word on page 19.

"We typically trade our beliefs about the market, and once we`ve made up our minds about those beliefs, we`re not likely to change them. And when we play the markets, we assume that we are considering all of the available information. Instead, our beliefs, through selective perception, may have eliminated the most useful information."


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## tech/a (3 October 2009)

Wysiwyg said:


> There are other places he mentions that we don`t trade the marhet, we trade our belief about the market.This is the paragraph word for word on page 19.
> 
> "We typically trade our beliefs about the market, and once we`ve made up our minds about those beliefs, we`re not likely to change them. And when we play the markets, we assume that we are considering all of the available information. Instead, our beliefs, through selective perception, may have eliminated the most useful information."




He's certainly not advocating this to be a correct way to trade even think.
Nor is he even coming close to saying that if it "fits" then go ahead and trade it.
He clearly makes the case that most peoples pre determined biases are flawed.
No arguement from this black duck.


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## motorway (3 October 2009)

So the Broad distinctions imo should be between

Subjective or Objective
Arbitrary or Systematic
Gross or Fine
Inflexible or Flexible

More of the right side ( as appropriate )
is BETTER -More of the left side   is undesirable ---
In the context of what works what makes profit

mechanical <---> discretionary 
can be  meaningless semantics
Both can have negative or positive connotations  

more to do with available tools ( eg code can/can not)
and application
than good or bad 

motorway


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## Temjin (3 October 2009)

Really interesting comments and discussion going on guys. 



tech/a said:


> Flexible rules/psychological make up can and mostly do add up to disaster.
> There is an implication that you need to trade more often in a discretionary manner to profit---Why?
> While backtesting may well be impossible the reason and structure of a good discretionary traders method wont/shouldnt change---if they dont know what structure will (long term) trade after trade after trade return a profit then they arent trading they are gambling/mostly reacting to emotion.







> While some automate most physically place the trade/s. *Bias should be removed*---the blueprint will clearly show whether the results found during the testing process are being reflected in live trading.
> If they arent then there is only one question which needs to be asked.
> 
> Has the market changed significantly from the market/s used in the testing of the mechanical system being traded.Generally the system will clearly show this(as I found out when 3 of mine were fooled by randomness) by being exited out of all or most positions and finding less than average prospects.




It's certainly true that a lot of mechanical traders out there don't fully automate at all. However, how do you determine if the market has changed significantly? Or your system is no longer capturing the "signals" as well as it used to be? Do you determine it discretionary? Or you have already pre-determined when it would be considered no longer working? 

Explanations below.



> Disagree strongly with this.Mechanical systems are designed to be proven wrong due to change in market conditions as explained above---not open or due to designers ability to read markets and use a discretionary skill!
> That in Blue is one solution there are others.




I guess I have not explained this with enough details. 

What I mean about the "system" to generate or eliminate profitable systems is purely mechanical, at least from my own perspective. For example, setting up the structure for back testing, pre-determine your objective for system selection, your ruin level based on your risk profile (how much drawdown to consider eliminating or turning off system), confidence level via monta carlo simulations, etc, etc.

All of these factors need to be pre-determined first. Discretionary skill from a mechanical trader only comes from selecting which "strategies" to test on and then using the "system" to determine if it has a tradeable edge. (and when it has lost it)  

I would certainly not use my intuition at this stage to say whether a previously working system has failed or not. If it has lost its edge, then analyzing the results would certainly reveal it. 



> I dont know that they are (Advantages and disadvantages).
> I think the discretionary trader like it or not needs the mechanical blueprint of his structure to KNOW if what he is doing is actually skewing his results in his favour or if in fact he has a disjointed string of trades which have no structure toward being profitable---he's gambling.




It's up to you on how you choose to label their differences.  I see it as pure advantages and disadvantages, others may think as positive or negatives, or others may see it as strengths or weaknesses. Doesn't matter, since the differences are clear enough, at least to me anyway. 

 I agree with you that discretionary trader needs a blueprint to determine if his trading style actually has an edge or not. He/she may not be able to backtest it, but like I said before, the results can be analysed to reveal more information. Mistakes that caused for the dismay performance may become more clear. 



> I havent seen where Van Tharp has actually said that but to me its a cop out. Fits you more means? Sure you can be warm and fuzzy about patterns but trade 100 of them or any other discretionary signal in a disjointed jumbled fashion it will and has become very clear to many that a bias or feeling toward a particular trading idea placed into a loose strategy---becomes a pretty un comfortable "fit".




Perhaps I may have mistaken his point?

But here is where he has a habit of repeatedly it in his newsletters every so often, and usually right from the start of his article. (knowing Wysiwyg has posted a similar one)


> _I              always say that people do not trade the markets; they trade their              beliefs about the markets. In that same way I'd like to point out              that these updates reflect my beliefs. If my beliefs and your              beliefs are not the same, then you may not find them useful. I find              the market update information useful for my trading, so I do the              work each month and I'm happy to share that information with my              readers._
> _However,              if your beliefs are not similar to mine, then this information may              not be useful to you. Thus, if you are inclined to do some sort of              intellectual exercise to prove one of my beliefs wrong, simply              remember that everyone can usually find lots of evidence to support              their beliefs and refute others. Just simply know that I admit that              these are my beliefs and that your beliefs might be different._





I would interpret this way. I believe mechanical trading or whatever trading strategy is more "useful"/"applicable"/"suitable" to me, based on whatever logical reasonings and evidences I have. Others may not agree with it, so therefore, would not find it useful. 






			
				[/SIZE said:
			
		

> bingk6] 	 		 		Nice Post Temjin.
> 
> I also add that mechanical traders tend to perform a lot of backtesting of their strategies, which can give them some sort of instant feedback as to whether the stats that they have received are robust enough to commence trading a system.
> 
> ...



Thanks.  

I agree on the ability to perform a lot more backtestings and getting instant feedback. This is why people like Howard Bandy tend to favor mechanical system. I like his book a lot and it has given me alot of new insights on backtesting.


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## tech/a (4 October 2009)

Temjin said:


> Really interesting comments and discussion going on guys.
> 
> 
> 
> ...




The system devistes from the known tested results---in the case of the GFC-- the 3 I used did so significantly.The resultant effect on the systems is now included in the testing and the blueprints have altered to include the GFC trading. Didnt kill them either. 







> I guess I have not explained this with enough details.
> 
> What I mean about the "system" to generate or eliminate profitable systems is purely mechanical, at least from my own perspective. For example, setting up the structure for back testing, pre-determine your objective for system selection, your ruin level based on your risk profile (how much drawdown to consider eliminating or turning off system), confidence level via monta carlo simulations, etc, etc.
> 
> ...




A wish list.
Again I dont know that you nee to pre determine it.
A developed system will return all those stats you are looking for. You will accept or reject the stats before trading it.
Then once outside those tested stats youd stop trading it---well thats what most would do.




> It's up to you on how you choose to label their differences.  I see it as pure advantages and disadvantages, others may think as positive or negatives, or others may see it as strengths or weaknesses. Doesn't matter, since the differences are clear enough, at least to me anyway.
> 
> I agree with you that discretionary trader needs a blueprint to determine if his trading style actually has an edge or not. He/she may not be able to backtest it, but like I said before, the results can be analysed to reveal more information. Mistakes that caused for the dismay performance may become more clear.




Sure there are clear differences I can use analysis I cant code and skew results with its use.I can also move stops add trailing stops add to positions multi position size--add subtract trades---endless.
BUT the bottom line for me is always.
*AM I SKEWING* the results of this trade in my favor.
Am I increasing win rate,Increasing Reward to Risk (Or decreasing Risk to reward) or both during the trade.





> Perhaps I may have mistaken his point?
> 
> But here is where he has a habit of repeatedly it in his newsletters every so often, and usually right from the start of his article. (knowing Wysiwyg has posted a similar one)
> [/SIZE][/FONT][/I]
> ...





Which after reading Van Tharp a few times I would add
*At your peril.*






> Thanks.
> 
> I agree on the ability to perform a lot more backtestings and getting instant feedback. This is why people like Howard Bandy tend to favor mechanical system. I like his book a lot and it has given me alot of new insights on backtesting.




More than anything testing and developing systems has taught me what I need to keep in mind when trading in a discretionary manner.
What works/how I can adjust all of those things mentioned above to increase my overall return on risk.
I dont need HARD stats I have the ability to define in a discretionary trading method ---- what to use and how to apply it to put discretionary trading squarely on the ++ side from the knowledge both positive and more so negative (What doesnt work) gained through hrs of testing and developing.

*So I would advise mechanical first discretionary second*.
99.9% of the time its the other way around and most fail.
I certainly did before I spent the time and effort!


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## Temjin (5 October 2009)

> A wish list.
> Again I dont know that you nee to pre determine it.
> A developed system will return all those stats you are looking for. You will accept or reject the stats before trading it.
> Then once outside those tested stats youd stop trading it---well thats what most would do.




Then you have already pre determine it. "the stats you were looking for" And that if recent results deviate from those tested stat, you would have specific actions for it. Either re-evaluate/optimise the strategy and getting back the stats you are looking for, or like you said, just stop trading it. Permanently or temporary. 



> Which after reading Van Tharp a few times I would add
> *At your peril.*




That goes to same to anyone who are trading with a specific system that they have confidence in. (with statistical evidences to back that up of course!) It does not matter if it is discretionary or systematically.

The bottom line is to find an edge, know where it is coming from, and maintain and trade it for as long as possible and leverage the compounding effect. 




> More than anything testing and developing systems has taught me what I need to keep in mind when trading in a discretionary manner.
> What works/how I can adjust all of those things mentioned above to increase my overall return on risk.
> I dont need HARD stats I have the ability to define in a discretionary trading method ---- what to use and how to apply it to put discretionary trading squarely on the ++ side from the knowledge both positive and more so negative (What doesnt work) gained through hrs of testing and developing.
> 
> ...




So what you are suggesting is, one may trade mechanically first, but would eventually develop their own intuitions over time to determine what factors are responsible for maintaining and improving his edge without going through hard statistics all the time? So the trader now acts in a more discretionary manner when developing and testing systems. Whereas, newbies have to rely on pure statistics to gain the confidence first. 

If so, then I agree and it certainly would come over time with experiences.

Of course, that is assuming if that trader's account balance would last that long or understood why he/she had failed.  

Thanks for the comments.


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## tech/a (5 October 2009)

*T*

I think we are in the same book---if not the actual page.


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## Temjin (6 October 2009)

Phew! Thanks, great to hear I got it this time.


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## Wysiwyg (19 May 2011)

motorway said:


> Both can have negative or positive connotations
> 
> more to do with available tools ( eg code can/can not)
> and application
> ...




E.G. ..... Code can when market conditions are right but code can't see, hear, smell, taste or feel conditions so brain helps out.


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## Wysiwyg (20 May 2011)

Has anyone successfully created a rigid, long only mechanical stock trading system that they use with real money? By created I mean coded,  backtested and functioning in real time with real money. By coded I mean ...

1) buy conditions
2) sell conditions
3) risk/position size

I am not having any luck with creating a successful long only mechanical stock trading system. I have success stock trading using eyes and ears.


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## Gringotts Bank (20 May 2011)

wysiwyg, yes I've a coupe of systems, but they're not spectacularly high in % returns.  

Try this: optimize for 'smoothness' and 'low draw downs' ahead of '% return'.  If you get a *very *smooth curve over many years, but a % return of say 5%, simply add leverage.  As much as you want... or as much as you dare!  Leverage it up to 500% if you want.  AB will do that for you.


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## Wysiwyg (20 May 2011)

Gringotts Bank said:


> wysiwyg, yes I've a coupe of systems, but they're not spectacularly high in % returns.
> 
> Try this: optimize for 'smoothness' and 'low draw downs' ahead of '% return'.  If you get a *very *smooth curve over many years, but a % return of say 5%, simply add leverage.  As much as you want... or as much as you dare!  Leverage it up to 500% if you want.  AB will do that for you.



Thanx for replying. I hope some more reveal their experience in creating a mechanical stock trading system.

Yes I have some systems that return mediocre but not anywhere near as effective as (my?) discretionary decision making. The damn codes can't read or see and have a terrible time when conditions aren't favourable such as the strong bull run from 2003 to mid 2007 and the bounce from Mar. 2009. Obviously these are retrospective events and if another bull run started now then results would be good again.  

I have tried optimising but change the period and results are different again.

I will tell it straight. Mechanical systems (just mine?) don't know when to close a trade and closing a trade is timing and an acquired skill. Something to become better at for mine.


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## Gringotts Bank (20 May 2011)

wys, the last month or so has been very hard on my 3 systems.  Luckily I don't system trade.  I just use the systems to get a general idea of where an edge is likely to be found.  

Look at the market right now, see what it's doing, then if you want to, put it into code.  eg. low volumes in spec shares, weak movements with lots of gaps, no stocks putting on 40+%, etc.  All this can be coded easily into your own custom indices.  The mood of the whole market can be decided by looking at stocks under $1. 

Closing trades - I haven't found better than the parabolic stop and reverse.


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## colion (21 May 2011)

Wysiwyg said:


> Has anyone successfully created a rigid, long only mechanical stock trading system that they use with real money? By created I mean coded,  backtested and functioning in real time with real money. By coded I mean ...
> 
> 1) buy conditions
> 2) sell conditions
> ...




A very simple and fairly effective system is:

Buy = C > Fixed Stop
Sell = C < Fixed Stop

The Fixed Stop % will depend on the market but 5% is a good reasonable starting point.

Paper trade it and see how you do.


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## tech/a (21 May 2011)

Wysiwyg said:


> Has anyone successfully created a rigid, long only mechanical stock trading system that they use with real money? By created I mean coded,  backtested and functioning in real time with real money. By coded I mean ...
> 
> 1) buy conditions
> 2) sell conditions
> ...




Yes

Techtrader was traded live for 7 yrs and still used by many traders.
Its record is still on the net
It will also have a place in Radge's new book.

What many find difficult is they expect a long only longterm method to work well in *ALL* market conditions. Simply it wont--just as a short only system wont work well in a longterm trending market.

Why am I not trading T/T since 2007
(1) I was certain that there was going to be a large and devastating fall in the market and the funds generated by  T/T were enough that I did not wish to risk them.
The system basically shut itself off a few months later (All positions stopped) at a closed equity figure close to my liquidation of funds.
(2) Discretionary trading is (for me) easier in this turbulence.

By the way though T/T did make new equity highs after the GFC.
Even surprised me!


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## Wysiwyg (21 May 2011)

colion said:


> A very simple and fairly effective system is:
> Buy = C > Fixed Stop
> Sell = C < Fixed Stop
> The Fixed Stop % will depend on the market but 5% is a good reasonable starting point.



Thanks but not really chasing a strategy as such because I have tried so many that are mediocre that I know it is market conditions one needs to trade using any simple code i.e. MACD/Signal cross. As tech/A mentions it is obviously the market conditions. 

Trading three strategies; one for uptrend market, one for ranging and one for downtrend market. Trick could be foreseeing the trend direction and trading it with the defined strategy. Yes, so simple.


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## colion (21 May 2011)

The neuronet guys use this type of scheme.  Simple?  I hope you find that to be the case.


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## Boggo (21 May 2011)

Wysiwyg said:


> Has anyone successfully created a rigid, long only mechanical stock trading system that they use with real money? By created I mean coded,  backtested and functioning in real time with real money. By coded I mean ...
> 
> 1) buy conditions
> 2) sell conditions
> ...




Some of these videos such as the one in the link below demonstrate a short term hit and run approach that does work even in the current market.

The video is using 3 min YM charts which are more continuous than the daily ASX stock charts which can have erratic gaps between one days close and the next days open etc.

Regardless of that it highlights and demonstrates methods that can be used in almost any markets with the emphasis being on controlling risk and knowing when to take profits.
(I am not plugging the software here but it does make it easier to apply the method)

Worth a look anyway I think for the concept.
http://www.youtube.com/watch?v=mb_gT_tO9FY&feature=related


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## Wysiwyg (22 May 2011)

Boggo said:


> Regardless of that it highlights and demonstrates methods that can be used in almost any markets with the emphasis being on *controlling risk* and *knowing when to take**profits.*



That being an individual thing which is as variable as the number of market participants and their strategies.


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## Boggo (22 May 2011)

Wysiwyg said:


> That being an individual thing which is as variable as the number of market participants and their strategies.




Or the reason why only 5% to 8% make consistent profits and the rest either give up, go to the casino or race track, or become 'investors' with a large bottom drawer.


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## motorway (22 May 2011)

Wysiwyg said:


> E.G. ..... Code can when market conditions are right but code can't see, hear, smell, taste or feel conditions so brain helps out.






> "We need a face-saving way to let go of our pre-conceived notions and the best way to do that is to understand how we make mistakes in our thinking. Thinking is really built for survival, not for truth; that’s how we made it as a species.
> 
> Our thinking is programmed to be very efficient and to draw premature conclusions so we don’t spend too much time deliberating about ‘whether to run from the sabre-toothed tiger or not’. And that’s wired into us.
> 
> ...




Objective , Reproducible , Systematic & Flexible as long as we avoid the _natural mistake of thinking_ which is a significant factor connected  imo to Boggo's post

==> 







> the reason why only 5% to 8% make consistent profits and the rest either give up, go to the casino or race track, or become 'investors' with a large bottom drawer.




You would not have anything in the Bottom Draw if you did not _Think_ too  much.

But instead just ran from the  "sabre-toothed tiger"

Motorway


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