Discretionary vs. Mechanical

wayneL · 20 March 2006

This thread is to follow on from the "Question on Margin Lending" thread rather than take that one off topic.

I don't want this to be a mechanical versus discretionary trading argument. I will not go there. I personally hate mechanical trading, but not silly enough to criticize it. It obviously suits some people, It obviously can work. It can obviously fail too, if the premise on which backtesting is conducted is faulty. But that doesn't take away from mechanical tradings validity.

So it is with discretionary trading.

Firstly lets define what discretionary trading is. It can be buying and selling on a whim, what's hot, gut feel whatever. If this is all it is, then Tech/a's comments could be valid. But to consider all discretionary traders to be like this is a monumental and delusional assumption.

A disc trader can be very rule based and may be much more discerning than a mech trader. I can only speak here of my own example.

Tech presumes disc trader has no numbers so obviously couldn't have done any backtesting. BS! I backtest a lot. I have 3-4 stops that I use, and I have an entry scan that I use, and here's the rub. These can (and in fact I have done) be developed into a tidy mechanical system in their own right.

So where does the discretion come in? I look at the general "type" of stock it is and decide whether to use a target, or a trailing stop, and if a trailing stop, which trailing stop.

When I enter I don't just enter because the squiggly blue line crossed the the line witrh the pleasing shade of green. No, I have to "like" the pattern based on what I have observed in the market for that type of stock (or future or whatever) But my "mechanical" entry criteria will always be satisfied...apart from those times where there is a good looking trade off supp/res.

I may learn a bit "about" the compnay; not really fundamentals, but what people think of the fundamentals, whether ther is positive sentiment etc

There will always be entry, stop, target/trailing stop, breakeven stop, whathaveyou.

Tech said:

No even with a Disciplined Discretionary method they have absolutely no idea whether they have a profitable method.

BS! "Profit" determines a profitable method and only profit. Tech admits that a mech system must be traded to see if it matches it's blueprint.

Well let me tell you I have a benchmark expectancy that I trade to. My spreadsheet has total expectancy and a MA of the same. If my expectany MA is not up to the benchmark and overall expectancy, I'm starting to too some self analysis...real fast.

So why don't I like mech systems, purely and simply they don't return enough for me, pure and simple. Not withstanding that mech trend following sytems have performed very well on the ASX, it must be observed that we are in a rampant bull, this is a rather extraordinary period in the Aussie market. The most cursory glance at the long term XAO will show that.

I trade full time and I want a cheque at the end of the month that never draws on capital. I am running a business. Only through discretionary trading, can I achieve that. If I had a separate job or business my point of view would probably be entirely different, and a mech system might become suitable in those circumstances.

But when we go sideways or into a bear, mech systems will struggle. Thats not such a drama for those who work. It's a drama for me. I'll be trading discretionarily in those periods, short, long, sideways and I'll outperform mech systems hands down. I'll always make a living, a good one.

I know this because I have done it. I made a living throegh the post 9/11 bear, I made a living in the US sideways market over the last year or two.

So don't tell me disc traders have no idea. It's BS, it's arrogant and it's puerile! ...and to use Ducs favourite term, it's nonsense!

Cheers

ducati916 · 20 March 2006

Re: Discretionary vs Mechanical

enzo

I don't want this to be a mechanical versus discretionary trading argument. I will not go there. I personally hate mechanical trading, but not silly enough to criticize it. It obviously suits some people, It obviously can work. It can obviously fail too, if the premise on which backtesting is conducted is faulty. But that doesn't take away from mechanical tradings validity.

For someone wishing to avoid the argument, you are providing plenty of fuel to the fire.

Firstly lets define what discretionary trading is. It can be buying and selling on a whim, what's hot, gut feel whatever. If this is all it is, then Tech/a's comments could be valid. But to consider all discretionary traders to be like this is a monumental and delusional assumption.

It would be easier to define discretionary trading as subjective trading and mechanical or rule based as objective trading

Tech presumes disc trader has no numbers so obviously couldn't have done any backtesting. BS! I backtest a lot. I have 3-4 stops that I use, and I have an entry scan that I use, and here's the rub. These can (and in fact I have done) be developed into a tidy mechanical system in their own right.

Your above methodology I must admit does not inspire any confidence in myself either with regards to a systematic approach to backtesting based only on the information that you have provided.

I, and most likely tech/a would be looking for the following information on all listed criteria; how many trades? How many years?
Anything less than tens of thousands of trades, and 30+yrs, is just plain not going to cut it.

Backtesting within the systems approach is attempting to quantify a statistical significance of the entry, exit, stoploss, position size etc of their hypothesis.

This is where the confusion has arisen.
You have indeed a mechanical system.
A mechanical system can exist, without being backtested.
A backtested mechanical system can exist without being statistically significant.

So where does the discretion come in? I look at the general "type" of stock it is and decide whether to use a target, or a trailing stop, and if a trailing stop, which trailing stop.

Which is discretionary, or subjective. Agreed.

When I enter I don't just enter because the squiggly blue line crossed the the line witrh the pleasing shade of green. No, I have to "like" the pattern based on what I have observed in the market for that type of stock (or future or whatever) But my "mechanical" entry criteria will always be satisfied...apart from those times where there is a good looking trade off supp/res.

And this is where you are incorrect.
You either trade to a pre-defined mechanical plan, which in effect is a squiggley blue line, or you do not. If "not" then it is now no longer mechanical, but subjective, or discretionary, which by rule of logic must invalidate any pretence of a "mechanical trigger" based rule. Mechanical and Discretionary are mutually exclusive.

Well let me tell you I have a benchmark expectancy that I trade to. My spreadsheet has total expectancy and a MA of the same. If my expectany MA is not up to the benchmark and overall expectancy, I'm starting to too some self analysis...real fast.

The issue will become; how did you "develop" your benchmark expectancy?
If developed via "experience" the relevant data must revolve around how many trades and how many years, or, how many trades over how many years did you backtest, and how high a quality was the design of your testing methodology?

Without high quality answers to those questions, your benchmark, apart from any psychological support, has almost no relevance at all, and could be ascribed to luck, or randomness.

So why don't I like mech systems, purely and simply they don't return enough for me, pure and simple. Not withstanding that mech trend following sytems have performed very well on the ASX,

You are not really thinking.
TT currently aggregates $10K/week (unrealized profit)
With compounding that will only grow, while the methodology stays within its design parametres. All successful longer term systems/methodologies tend to return more than short-term methodologies, save the odd exception to the rule. What is initially deceiving, is that they take a little while to crank up, and get into full flow.

But when we go sideways or into a bear, mech systems will struggle. Thats not such a drama for those who work. It's a drama for me. I'll be trading discretionarily in those periods, short, long, sideways and I'll outperform mech systems hands down. I'll always make a living, a good one.

Sounds rather like a prediction.
I tend to agree, but, that does not mean it will be so.
That you feel that you will always outperform, maybe yes, maybe no. That you'll beat mechanical systems hands down.......well, tech/a has his results on the board baby!

So don't tell me disc traders have no idea. It's BS, it's arrogant and it's puerile! ...and to use Ducs favourite term, it's nonsense!

I suppose it's just as well that you have moderators privilege, as you have I believe made an inflammatory post. Shame on you for letting that ego out of the bag, and having a run round the board.

jog on
d998

bullmarket · 20 March 2006

Re: Discretionary vs Mechanical

Good afternoon everyone

I agree with wayneL in that there is more than one way to make money investing or trading in the stock market.

And without wishing to get involved in a potentially navel gazing thread

I just find it amazing how those like ducati and tech/a who are fixated on their own ways of doing things and generally dismissing methods that have undeniably worked for others constantly leave themselves wide open to being thought of as fools and laughed at by those who don't invest/trade with the same views/methods as them and are much more successful and wealthy than either of them might claim

I'll just continue to watch with amusement

cheers

bullmarket

wayneL · 20 March 2006

Re: Discretionary vs Mechanical

Settling an old score Duc?

Most of your points are tiresome nitpicking and pedantry, designed specifically to be contrary, so won't bother with those. However:

Your above methodology I must admit does not inspire any confidence in myself either with regards to a systematic approach to backtesting based only on the information that you have provided.

I, and most likely tech/a would be looking for the following information on all listed criteria; how many trades? How many years?
Anything less than tens of thousands of trades, and 30+yrs, is just plain not going to cut it.

Backtesting within the systems approach is attempting to quantify a statistical significance of the entry, exit, stoploss, position size etc of their hypothesis.

I am not interested in inspiring confidence in you. My "testing" is not rigourous, admittedly, and need not be, for my purposes. The reason is because I am not abdicating my trading decisions over to a piece of software....and never will.

You are not really thinking.
TT currently aggregates $10K/week (unrealized profit)
With compounding that will only grow, while the methodology stays within its design parametres. All successful longer term systems/methodologies tend to return more than short-term methodologies, save the odd exception to the rule. What is initially deceiving, is that they take a little while to crank up, and get into full flow.

And this is the result of compounding in a very bullish market and beholden to capital at disposal. If the trader were to be removing income from the system it would be a very different story. This is why I make the distinction between circumstances.

This comment also has no way of comparison with my returns. I will make no representations whatsoever here as to my returns, however sans that vital comparison, this is not relevant at all. I could be trading a $10,000,000 account or I could be trading a $50,000 account.

well, tech/a has his results on the board baby!

This, comment can only stem from the assumption that I don't. Well my results aren't public, and will remain private. But I am happy and we'll leave it at that.

I suppose it's just as well that you have moderators privilege, as you have I believe made an inflammatory post. Shame on you for letting that ego out of the bag, and having a run round the board.

Oh the irony!!!!! ROFL

Ciao

stevo · 20 March 2006

Re: Discretionary vs Mechanical

:horse:

As all good discretionary traders and chartists will tell you the picture is worth a lot of words.

stevo

tech/a · 20 March 2006

Re: Discretionary vs Mechanical

Wayne.
You trade in a systematic manner not discretionary. While some parts of the method may appear discretionary they are infact part and parcel of your trading plan.
You wouldnt be able to get any numbers at all with a purely discretionary method.

As youre running a business you must have your own numbers and if they werent giving you good return then you'd look again at your rules.

I guess in the 12 yrs being involved in Forums the only methods I have seen show a consistent profitable result (That can be verified and followed by anyone) are those that are mechanical.
Ive seen probably 6 have a good crack at trading in various other ways to show superiority of Discretionary and Systematic trading both in technical and Fundamental methodologies and havent yet seen one with consistant return even in a "Raging Bullmarket".(All credit to Duc he is demonstrating his ideas on fundamental trading--havent worked out what label to place his trading "type" under)

Simple buy here and sell there short term trading logs---live just dont come up for comparison or discussion.
Daytrading logs would be very difficult and time consuming to post--but I would venture to say that none of these would be profitable if totally discretionary---without method.

All a mechanical trader is doing is arranging his "Product" into a package he is willing to invest in.It becomes finite,within the parameters of the "blueprint".
I could trade like this for a living very easily---but it would bore me stupid and I dont have to.

Just remember that it all started with 30K on Margin and now has at times 10K a week return.
If that was 200K on margin---well you do the figures.

This argument that seems to always crop up on Bullmarkets-----
We dont advise buying property in a downturn particlarly a prolonged one.
Why would you be heavily weighted long in a prolonged downturn in the stock market?
Doesnt it make sense that if your running your business of "Personal wealth creation or Maintenance" that you as the director of your company,recognise opportunity and mitigate risk.To blindly run your company without flexibility relative to changing market conditions is pure negligence.
A good company will be diverse not fully vested in areas which are underperforming.Highly geared in overperforming areas for as long as the opportunity exists.It will always have flexibility.It would also be wise not to have only one income stream---The markets--.

Its taken 34 yrs for me to "balance" my diversification to the point where gearing in any one investment doesnt over expose "The Business".Of course that gearing in either 1 of the 4 Business types I hold in the Major Business varies from time to time--and sure Ive got it wrong--fortunately not all 4 at the one time.

Not everyone is like you Wayne or Myself,everyone has very different capital bases although most have a similar goal---Financial security.

Here the larger majority are undercapitalised and have little or no structure to their trading or even their "Business of wealth creation".
If people are happy trading as you do or in a discretionary manner or daytrading,then thats what they will do.

But from the emails I have had over the last (In particular 2yrs) nearly 4 yrs many are and have been disillusioned with hypothetical rhetoric which when applied has either cost them dearly or been found to be just plain unfounded.
Both Technically and Fundamentally.

Serious investors cant have that regardless of age or capital base.
Sure there are many ways to have a winning trade but I'm yet to see another consistant way to make a profit with serious funds that I would add to my business as part of diversification.
I hope Duc displays an alternative and we see a few more do similar as like everyone else I'd like to add another string to the Business bow.

The old adage Crawl before you walk seems to have lost its message the day most took their first step.

It's Snake Pliskin · 20 March 2006

Re: Discretionary vs Mechanical

Where does part science, part art come into this discussion? There are those who advocate the art of trading, but if they are using purely mechanical systems how can the art be expressed? :screwy:

tech/a · 21 March 2006

Re: Discretionary vs Mechanical

Snake Pliskin said:
Where does part science, part art come into this discussion? There are those who advocate the art of trading, but if they are using purely mechanical systems how can the art be expressed? :screwy:

In the successful developement of that method
There arent that many of them around either that can return +20%. (Obviously more leveraged).

I had a look at Hometrader and met with their principals in Adelaide and their testimonials of successful mechanical traders came from a monthly competition.Winners received cash prize.Most months had winners showing 30-50% profit---which looked great until you found out they were trading CFD's at 10x leverage.Looking further I never found the same winner even in the top 20 in the next months. Asking for 12 mth winners--they didnt have any.On the plus side they seemed genuine,---no not a member-- I went due to a question on Hometrader and went to find out for myself.

tech/a · 21 March 2006

Re: Discretionary vs Mechanical

Wayne

This, comment can only stem from the assumption that I don't. Well my results aren't public, and will remain private. But I am happy and we'll leave it at that.

I dont think thats Ducs intention, but youve been pretty vocal re how I trade rather than "Disclose" your past performance why not disclose your future trades to demonstrate.
Shouldnt be a problem should it? Anyone can demonstrate profit in a Bullmarket.

Bulldust hows your ASX comp going? Raging Bullmarket should have you well up there.

ducati916 · 21 March 2006

Re: Discretionary vs Mechanical

bullmarket

I just find it amazing how those like ducati and tech/a who are fixated on their own ways of doing things and generally dismissing methods that have undeniably worked for others

I think if you had actually read the posted material you would find that the "opinion" has in addition an argument in support of the opinion.
If you read even a little further, you may find that the "argument" contains some evidence that is verifiable.

constantly leave themselves wide open to being thought of as fools and laughed at by those who don't invest/trade with the same views/methods as them and are much more successful and wealthy than either of them might claim

Of course, and there is the opportunity for all and any to provide a reasoned, supported, argument as to why, we or myself are in point of fact foolish.

Now I have examined your post, even utilizing an electron microscope, searching for any evidence to support your post. Alas, there seems to be nothing resembling the aforementioned.

I'll just continue to watch with amusement

No surely not.
You have not as yet copied and pasted your methodology onto this new thread yet.

enzo

I am not interested in inspiring confidence in you. My "testing" is not rigourous, admittedly, and need not be, for my purposes. The reason is because I am not abdicating my trading decisions over to a piece of software....and never will.

Well nothing more really need be said then.
If your testing is not rigourous, then it is by definition substandard.
You really have no idea how, or what constitutes testing, nor seemingly the purpose of testing, so your whole purpose was to have a "rant" and let off emotional steam.

And this is the result of compounding in a very bullish market and beholden to capital at disposal.

No, not really.
TT started with $30K & utilized leverage.
A daytrader can also start with $30K and leverage. So the "Capital" can be equivalent. Compounding is the key. If you remove all or part profits for living expenses, you will compound more slowly, or not at all.
The % returns can be similar, or better even than a long term method, however it is only a very small % that actually seem to succeed with short-term methods.

This comment also has no way of comparison with my returns. I will make no representations whatsoever here as to my returns, however sans that vital comparison, this is not relevant at all. I could be trading a $10,000,000 account or I could be trading a $50,000 account.

Indeed.
However it was you yourself that invited the comparison;

and I'll outperform mech systems hands down. I'll always make a living, a good one.

I know this because I have done it. I made a living throegh the post 9/11 bear, I made a living in the US sideways market over the last year or two.

So don't tell me disc traders have no idea. It's BS, it's arrogant and it's puerile! ...and to use Ducs favourite term, it's nonsense!

This, comment can only stem from the assumption that I don't. Well my results aren't public, and will remain private. But I am happy and we'll leave it at that.

And you became quite agitated regarding the entire issue.
No one questioned your results, or lack thereof.
tech/a results are on the board, and unless you are willing to provide trades that demonstrate the verity of your assertions, then comparisons with TT posted results are definitely a poor argument to base your post on.

Oh the irony!!!!! ROFL

Not at all.
I have never denied being an egotistical b*****d. In fact I revel in it.
You however seem to be taking a very hypocritical stance.
You post criticising me for it on other forums, but, hide behind moderator status when you wish to have your own rant.

stevo

As all good discretionary traders and chartists will tell you the picture is worth a lot of words.

And similar to all who believed that the world was flat, they are wrong.

Snake

Where does part science, part art come into this discussion? There are those who advocate the art of trading, but if they are using purely mechanical systems how can the art be expressed?

I would put it to you, that the more you can eliminate the art component, and maximise the science component, the more money you will actualise

Trading/Investing shares similarities with Law & Medicine in that the interpretation of the analysis is where the art component manifests itself. However in both these professions there has been an ever growing body of documented evidence gathered by the professions to further the interpretation on a quantitative basis.

This does not happen within our profession.
Secrecy is the order of the day. Divulgence of trading records would add the the general knowledge and progress rational strategies, this however does not happen. Therefore the quantitative gathering of data falls to the individual. The higher the quality of the data gathering, the better the ultimate results should be.

jog on
d998

bullmarket · 21 March 2006

Re: Discretionary vs Mechanical

Hi ducati

I just call things as I see them....I can't be any fairer than that

I see you are now resorting to quoting partial sentences of mine out of context

which, to me at least, portrays your immaturity and frustration in a failed childish attempt to refute my perception.

So let me remind you of what I posted (the entire sentence and not from the middle of it starting from the word 'constantly').

And without wishing to get involved in a potentially navel gazing thread I just find it amazing how those like ducati and tech/a who are fixated on their own ways of doing things and generally dismissing methods that have undeniably worked for others constantly leave themselves wide open to being thought of as fools and laughed at by those who don't invest/trade with the same views/methods as them and are much more successful and wealthy than either of them might claim

I trust that my entire sentence clears up for you the reason behind my view.........if it doesn't then so be it

I have also posted an overview of what I do in other threads and in PM's to other chatters if you are genuinely interested, but I'm not convinced you are.

see you in the soup.

bullmarket

ducati916 · 21 March 2006

Re: Discretionary vs Mechanical

bullmarket

I just call things as I see them....I can't be any fairer than that

Of course.
And this observation goes directly to the heart of the current discussion, which is an objective, mechanical methodology, or a discretionary, subjective methodology

That you have nothing in your posts save "opinion" it would seem that you are a firm subscriber to the "subjective" camp, and in point of fact this assertion of mine would seem to be supported from the evidence;

I agree with wayneL in that there is more than one way to make money investing or trading in the stock market.

That may or may not be true. Where is your evidence?
However no-one is actually saying that there is only one method.
What we are saying is;how do you know that your personal methodology is in point of fact one of the "others"? The others = successful?
Lets use an example.
JoeT has been trading for 1year and completed 100 trades and has made a 50% return.
Is JoeT and his methodology one of the successful methods?

BobB has been trading for 40yrs, has completed 100,000 trades, returning 35% compounded on aggregate.

My question being, who's methodology would you most rather have access to? I would go for JoeT, because, hey, he made 50%.

So while you are absolutely entitled to your opinions, and I would always defend your right to post them, that does not mean that what you post is any less the nonsense than it actually is.

I see you are now resorting to quoting partial sentences of mine out of context which, to me at least, portrays your immaturity and frustration in a failed childish attempt to refute my perception.

I chose only the relevant points of your post.
Navel gazing etc, is just nonsense.
But germane to the discussion is again the very subjective nature of your post. You are making assumptions with no evidence;

Immaturity.......based on what evidence?
Frustration......based on what evidence?
Failed childish attempt.....based on what evidence?

It would seem that far from displaying the analytical ability to dissect my post, and argue a relevant case against my assertions on any factual basis, you have fallen into the usual tactic of making a personality attack.

This serves two purposes.
It deflects interest from the subject or topic under discussion, and diverts attention away from the embarrasment of the inability to respond on a logical, factual, evidenced basis to the criticisms made.

In the second, it will often divert the original poster, riled by the personality attack, to respond in kind. This really serves little, or no purpose, as the topic then falls by the wayside, and argy-bargy rules the roost.

The purpose of these discussions is really to argue the topic, as we may all learn something that we didn't fully realize without the outside input.

I trust that my entire sentence clears up for you the reason behind my view.........if it doesn't then so be it

No it does not.
Simply because it is irrelevant and extraneous to the topic, although you have provided some interesting perspectives on psychological input, and its relevance to the pitfalls associated with a subjective perspective.

jog on
d998

bullmarket · 21 March 2006

Re: Discretionary vs Mechanical

no problem ducati

re your comment:

No it does not.
Simply because it is irrelevant and extraneous to the topic, although you have provided some interesting perspectives on psychological input, and its relevance to the pitfalls associated with a subjective perspective.

that's fine, I don't have a problem with that

If you go back to my original post in this thread where you quoted from you will see that my post was not directed at you or anyone personally.

I was making an observation based on what I've seen in other threads.

Others have understood what I was saying in my observation and if you fail to see or agree with it then that is totally ok with me because as far as I can tell you are in a small minority.

cheers

bullmarket

wayneL · 21 March 2006

Re: Discretionary vs Mechanical

tech/a said:
Wayne

I dont think thats Ducs intention, but youve been pretty vocal re how I trade rather than "Disclose" your past performance why not disclose your future trades to demonstrate.

I have never criticised how you trade. In fact I have pointed out several times in the past that it is probably the best way to trade for a lot of folks.

But it is not the only way to trade, and I merely point out that 1/your returns have been enhanced by market conditions and 2/It is not suitable for me.

This whole scenario started from your criticism of discretionary trading.

I don't quite know why I thought it important to defend discretionary traders, but I no longer consider it important to.

I do not disclose my trades for reasons of protecting my trading psychology.

Duc,

Considering the amount of time and effort you have put into the construction your fallacious arguments, the level of your self esteem seems to be contingent upon winning arguments, even if they are founded upon erroneous suppositions, innaccurate accustions, and and making ludicrous comparisons to a field riddled with fraudulent and tainted research.

Mine isn't. So apart from that final self indulgent taunt, I am withdrawing from this thread permanently, I would prefer to read Lao Tzu than Ducati 916.

I regret starting this thread and it is now serving no useful purpose apart from making d%^$heads of all us blokes. The girls must just shake their heads.

This thread should be closed now, but I will wait till the end of the day to allow right of reply.

Cheers

wayneL · 21 March 2006

Re: Discretionary vs Mechanical

Duc

Right of reply does not mean right to inflammatory remarks

Discretionary vs. Mechanical

wayneL

VIVA LA LIBERTAD, CARAJO!

ducati916

bullmarket

wayneL

VIVA LA LIBERTAD, CARAJO!

stevo

tech/a

No Ordinary Duck

It's Snake Pliskin

tech/a

No Ordinary Duck

tech/a

No Ordinary Duck

ducati916

bullmarket

ducati916

bullmarket

wayneL

VIVA LA LIBERTAD, CARAJO!

wayneL

VIVA LA LIBERTAD, CARAJO!

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