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Discretionary and Mechanical Systems
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Discretionary and Mechanical Systems

  #11 (permalink)
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Seahn View Post
The hard part is getting a computer program to consistently recognize the patterns under all market conditions and to be smart enough to stay out when things are not quite right. Trade patterns are not set in stone absolutes but generalized patterns, and not only does the software have to recognize the pattern, but the context is even more important otherwise followers of candlestick patterns would all be billionaires.

Something that with experience a person can recognize in an instant is very difficult to get a computer to do. There are probably algos out there that can do it but I bet they are not using TradeStation or Ninjatrader.

Sure its possible to make profitable automated strategies, I have a few, but you need to stay on top of them constantly because eventually they fail as market conditions change.

Can u or someone give a discretionary example and explain why
The decision was discretionary and not pattern driven.
Pic would be nice

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  #12 (permalink)
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nightshade View Post
Can u or someone give a discretionary example and explain why
The decision was discretionary and not pattern driven.
Pic would be nice

I think you missed my point. Ultimately discretionary trading is based on patterns. The problem is getting a computer to recognize the patterns, the higher concept patterns beyond this indicator crosses that indicator type of thing. As an example determining if the trading day will more likely be a range day rather than a trend day based on the initial action.

That is where the discretion is and its one of the most important things to making money every single day trading.

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  #13 (permalink)
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I think both ways of trading have their place but I do prefer mechanical trading for daytrading. Reason being that I am not fast enough to make decisions and place order in real time during market open when trading futures ES and TF mainly.

Auto trading is quick and I can watch to ensure it is doing what I expect.

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  #14 (permalink)
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Seahn View Post
Something that with experience a person can recognize in an instant is very difficult to get a computer to do.

"If you will tell me precisely what it is that a machine cannot do, then I can always make a machine which will do just that."
-John von Neumann

No quote applies more to discretionary vs algorithmic trading than that. If you think you can't turn your strategy into an algorithm it is because your strategy is largely made up of random reactions, whims, hunches and noise.

When you make things explicit by turning your strategy into an algorithm you might find there isn't much there without the random reactions, whims, hunches and noise. You could easily add those back in with random number generators that cause the strategy do things for no reason but of course that would make no sense.

Computers annihilate humans at finding patterns in data. That is not really debatable but the keyword is data. Computers vision is hardly on par with human vision but vision is not data analysis.

With that said I am purely discretionary but use a computer to try to keep an eye on as much data as possible.
I dumped all my long S&P risk and got long USD and volatility when 1 Month Euro Libor went negative a few weeks ago. That would be trivial to make into an algorithm, so much so I just don't bother.


Last edited by NoiseTrader716; October 4th, 2014 at 09:54 AM.
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  #15 (permalink)
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NoiseTrader716 View Post
"If you will tell me precisely what it is that a machine cannot do, then I can always make a machine which will do just that."
-John von Neumann

The markets are the farthest thing from a machine you can get. Markets are the net sum of all the fear, greed and whims of all their human participants. The notion that such a market can be turned into an algorithm is ludicrous.


NoiseTrader716 View Post
"No quote applies more to discretionary vs algorithmic trading than that. If you think you can't turn your strategy into an algorithm it is because your strategy is largely made up of random reactions, whims, hunches and noise."

It is not the strategy but the market that is largely made up of random reactions, whims, hunches and noise. That is why it is so very difficult to create an algorithm that will beat the market in the long run.

What technical traders whether mechanical or discretionary are doing is attempting to take advantage of self fulfilling prophecies created in the market when a herd of traders and computers are seeing and doing similar things.

For example the ES has a well know harmonic rotation of about 2 points intraday. The reason for this is that there are a lot of traders buying 2 point pullbacks and then selling at 2 point profit creating a self fulfilling prophecy. The problem is that it does not always work because of the aforementioned random reactions, whims etc. In fact if you designed an algorithm to trade the harmonic rotation in the ES it would not be profitable. That is the case with algorithms in general, there is always enough randomness to cause them to eventually fail . If you consider that markets are a zero sum game it makes sense that nothing will work all the time. If something worked all the time everyone would eventually discover it, then no one would take the other side of the trade.

This is where human intuition and skill comes in. A human with enough experience is able to very quickly assess the market conditions and adapt the trading system to the current conditions sufficiently to be profitable. One of the biggest causes of failure for novice traders is that they adopt a system and blindly follow it regardless of current market conditions.

I am sure there are quants out there that have gone a long way toward creating adaptable algorithms (I am also sure they are not using Ninjatrader or TradeStation) and advancements in computers and algorithms will eventually reach a point akin to human intuition, but because of the zero sum nature of the markets I guarantee makets will change just enough to thwart the algorithms.

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  #16 (permalink)
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Seahn View Post
The markets are the farthest thing from a machine you can get. Markets are the net sum of all the fear, greed and whims of all their human participants. The notion that such a market can be turned into an algorithm is ludicrous.



It is not the strategy but the market that is largely made up of random reactions, whims, hunches and noise. That is why it is so very difficult to create an algorithm that will beat the market in the long run.

What technical traders whether mechanical or discretionary are doing is attempting to take advantage of self fulfilling prophecies created in the market when a herd of traders and computers are seeing and doing similar things.

For example the ES has a well know harmonic rotation of about 2 points intraday. The reason for this is that there are a lot of traders buying 2 point pullbacks and then selling at 2 point profit creating a self fulfilling prophecy. The problem is that it does not always work because of the aforementioned random reactions, whims etc. In fact if you designed an algorithm to trade the harmonic rotation in the ES it would not be profitable. That is the case with algorithms in general, there is always enough randomness to cause them to eventually fail . If you consider that markets are a zero sum game it makes sense that nothing will work all the time. If something worked all the time everyone would eventually discover it, then no one would take the other side of the trade.

This is where human intuition and skill comes in. A human with enough experience is able to very quickly assess the market conditions and adapt the trading system to the current conditions sufficiently to be profitable. One of the biggest causes of failure for novice traders is that they adopt a system and blindly follow it regardless of current market conditions.

I am sure there are quants out there that have gone a long way toward creating adaptable algorithms (I am also sure they are not using Ninjatrader or TradeStation) and advancements in computers and algorithms will eventually reach a point akin to human intuition, but because of the zero sum nature of the markets I guarantee makets will change just enough to thwart the algorithms.


@Seahn just not true. I have made money for a long time using algorithms. Human intuition (gut feeling) is a farce in trading.

"The day I became a winning trader was the day it became boring. Daily losses no longer bother me and daily wins no longer excited me. Took years of pain and busting a few accounts before finally got my mind right. I survived the darkness within and now just chillax and let my black box do the work."
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  #17 (permalink)
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liquidcci View Post
@Seahn just not true. I have made money for a long time using algorithms. Human intuition (gut feeling) is a farce in trading.


I am glad you are having success and wish you the best, great thing about trading, there are lots of ways to reach the goal

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  #18 (permalink)
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If your trading with your own money trend following algos (80% I have seen incorporate nothing more than basic up-down trend following, moving averages and volume...not rocket science there) is just fine. If your managing someone else's money you need some sort of economic rationale on a daily basis why you made certain trades. I think an analysis of macro and micro economic factors ongoing, provides a basis whether or not to turn your machine on or tweak it for whatever reason on any given day. Those that simply trade on price I think are just lacking market know how. Something I picked up from a book I read....

"If informed traders act first (those utilizing news and fundamental research in their trading decisions) and uninformed traders (trend followers and systematic traders) imitate the informed traders, this behavior is consistent with rationality. The imitation trading by the uninformed traders helps the market incorporate relevant information and improves market efficiency.

Don't get me wrong...I love systematic trading and what it brings to the table, but I would never hand over a dime to someone who only told me that the chart has already incorporated all publicly available information without a valid fundamental reason. You need to play on both sides of the fence if your going trade with more than a few nickels.

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