Discretionary vs. mechanical trading

[weird]

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

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

 

[aramz]

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.

 

[wayneL]

Re: Example of my conservative trading strategy

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.

 

[tech/a]

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.

 

[Mr J]

Re: Example of my conservative trading strategy

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.

 

[tech/a]

Re: Example of my conservative trading strategy

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.

 

[wayneL]

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 )

 

[doctorj]

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

 

[aramz]

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

 

[Temjin]

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.

 

[Mr J]

Re: Example of my conservative trading strategy

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.

 

[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.

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.

 

[skyQuake]

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.

 

[wayneL]

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.

 

[Mr J]

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.

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.

 

[tech/a]

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".

 

[Wysiwyg]

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.

 

[skc]

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.

 

[tech/a]

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.

 

[Wysiwyg]

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

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."