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Discretionary and Mechanical Systems
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Discretionary and Mechanical Systems

  #1 (permalink)
Trading for Fun
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Discretionary and Mechanical Systems

Until recently I was an entirely discretionary trader who had learned to trade by reading the ticker and associating the behavior I saw with simple 15- and 30-minute bar charts. With my discretionary methods I have an average 27% net ROI per thousand round turns, with 9% max drawdown.

I had for a long time resisted any automated systems or backtesting. Considering that I have a university applied math degree and substantial experience in programming, this may suprise you. But my technical background is precisely the reason I chose to avoid automation: based on my knowledge of markets and how systems works, I had made the assumption that any system with static parameters cannot work. This assumption was supported during my reviews of other people's mechanical systems. Hence my devotion to discretionary trading. I assumed it was the only way to be consistently profitable.

Recently, I opened a TradeStation account because I was curious about backtesting a couple ideas. In the past, I had done my backtesting "on paper", as it were. Tradestation obviously makes this process so much easier - well worth the platform fee, in my opinion.

(As a side note, I am very impressed with TradeStation: the platform is well-designed and very stable, and the customer service is excellent. however, a couple very annoying limitation of the EasyLanguage which made things that should have been easy to program, annoyingly difficult)

During my playing around with TradeStation, I decided to translate the key concepts of my discretionary methods into a mechanical system, using mostly static parameters and only a single dynamic parameter. Much to my suprise, the results are consistently better than my discretionary results, which has made me rethink my original assumptions.

At this point, I am trading both systems ("for real" as they say) and curious to see how they compare over the next six months.

My conclusions at this point are:

* there is a substantial screw up factor in discretionary trading. Even if you are consistently profitable and have a solid trading strategy, and taking all the necessary precautions, you are messing yourself up enough to cause a dent
* A mechanical system can indeed work over the long term ...
* Automated backtesting (using Tradestation or similiar) is excellent practice regardless of what kind of trader you are. The process of tweaking your system makes apparent certain aspects of the market that may be more difficult to see if you are not looking at the data summary in front of you

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  #2 (permalink)
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  #3 (permalink)
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Hi,

I came across this thread whilst looking to educate myself. I am just curious how your experiment of discretionary vs mechanical systems is going? What are your conclusions so far? Also, are you trying this experiment on only one vehicle, or a number? Do some lend themselves to one style, while others behave the opposite?

Really interested in your results. Thanks.

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  #4 (permalink)
Trading Apprentice
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Nice post.

I have also concluded that mechanical trading is ultimately superior to discretionary trading over long periods of time, for many of the same issues you cited.

I am curious as to the nature of your system though. Would you say it is trend-following, counter-trend, or pullbacks within a trend?

Do you combine systems? If so, how do you handle simultaneous opposite signals in a market?

Do you diversify across time frames?

How many markets are you trading? How did you decide on those markets?

I bring up all of these questions because I do not know how discretionary trading can answer these questions with any evidence at all.

Money management systems can be overlaid on either systematic or discretionary trading but lend themselves much easier to the former, esp. when certain items such as stop losses are involved.

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  #5 (permalink)
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Now you guys are getting smart. Mechanical and automated just has so many advantages.

"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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  #6 (permalink)
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Funny

Funny, because I took the exact opposite path!

I started as a Quant in a Hedge Fund and now in a Trading House (I have a background in maths and computer science).

I developed several successful systematic strategies that work on probabilities, but now I am moving towards discretionary trading, exactly because of what you mentioned: static parameters cannot represent the diversity of the markets!

What I have not found yet is how to integrate the wealth of information provided by the backtests (that often goes against the common experience) with the incomparable uniqueness of the setups that comes with discretionary trading...

Still searching




mwtzzz View Post
Until recently I was an entirely discretionary trader who had learned to trade by reading the ticker and associating the behavior I saw with simple 15- and 30-minute bar charts. With my discretionary methods I have an average 27% net ROI per thousand round turns, with 9% max drawdown.

I had for a long time resisted any automated systems or backtesting. Considering that I have a university applied math degree and substantial experience in programming, this may suprise you. But my technical background is precisely the reason I chose to avoid automation: based on my knowledge of markets and how systems works, I had made the assumption that any system with static parameters cannot work. This assumption was supported during my reviews of other people's mechanical systems. Hence my devotion to discretionary trading. I assumed it was the only way to be consistently profitable.

Recently, I opened a TradeStation account because I was curious about backtesting a couple ideas. In the past, I had done my backtesting "on paper", as it were. Tradestation obviously makes this process so much easier - well worth the platform fee, in my opinion.

(As a side note, I am very impressed with TradeStation: the platform is well-designed and very stable, and the customer service is excellent. however, a couple very annoying limitation of the EasyLanguage which made things that should have been easy to program, annoyingly difficult)

During my playing around with TradeStation, I decided to translate the key concepts of my discretionary methods into a mechanical system, using mostly static parameters and only a single dynamic parameter. Much to my suprise, the results are consistently better than my discretionary results, which has made me rethink my original assumptions.

At this point, I am trading both systems ("for real" as they say) and curious to see how they compare over the next six months.

My conclusions at this point are:

* there is a substantial screw up factor in discretionary trading. Even if you are consistently profitable and have a solid trading strategy, and taking all the necessary precautions, you are messing yourself up enough to cause a dent
* A mechanical system can indeed work over the long term ...
* Automated backtesting (using Tradestation or similiar) is excellent practice regardless of what kind of trader you are. The process of tweaking your system makes apparent certain aspects of the market that may be more difficult to see if you are not looking at the data summary in front of you


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  #7 (permalink)
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siger View Post
What I have not found yet is how to integrate the wealth of information provided by the backtests (that often goes against the common experience) with the incomparable uniqueness of the setups that comes with discretionary trading...

I am not so sure that can be done. Once you introduce a discretionary variable into the mix it essentially invalidates not all but most of what can be gained from a backtest.


siger View Post
static parameters cannot represent the diversity of the markets!

@siger While static parameters can't represent the diversity of the markets they can be setup in way as to capture enough of what the market will give to do well. There are successful discretionary traders but I truly believe they are freaks of nature that are rare. Most would do better taking a mechanical approach. Unless someone is one of these freaks the market will ultimately exploit human nature and suck funds down into the discretionary black hole.

Curious as a trader that had a successful mechanical approach why change? Boredom? Your method stopped working?

"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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  #8 (permalink)
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liquidcci View Post
I am not so sure that can be done. Once you introduce a discretionary variable into the mix it essentially invalidates not all but most of what can be gained from a backtest.

I think the trick is to somehow program a "crude" version of the signal, so as to have numbers to rely on and then add a discretionary twist, and keep comparing the execution with the backtest to check that you are effectively adding something by being discretionary, and not subtracting.


Quoting 
Curious as a trader that had a successful mechanical approach why change? Boredom? Your method stopped working?

I am still using it, but as I said, it's working "on average" and I see several cases where the signal is not going to work for reasons that are too subtle to program.

Basically, we human have a lot of complex algos pre programmed in our visual cortex + some complex problem-solving heuristics that would take ages to reprogram.

I guess, I am trying to build a "systematic discretionary" approach

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  #9 (permalink)
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mwtzzz View Post
Until recently I was an entirely discretionary trader who had learned to trade by reading the ticker and associating the behavior I saw with simple 15- and 30-minute bar charts. With my discretionary methods I have an average 27% net ROI per thousand round turns, with 9% max drawdown.

I had for a long time resisted any automated systems or backtesting. Considering that I have a university applied math degree and substantial experience in programming, this may suprise you. But my technical background is precisely the reason I chose to avoid automation: based on my knowledge of markets and how systems works, I had made the assumption that any system with static parameters cannot work. This assumption was supported during my reviews of other people's mechanical systems. Hence my devotion to discretionary trading. I assumed it was the only way to be consistently profitable.

Recently, I opened a TradeStation account because I was curious about backtesting a couple ideas. In the past, I had done my backtesting "on paper", as it were. Tradestation obviously makes this process so much easier - well worth the platform fee, in my opinion.

(As a side note, I am very impressed with TradeStation: the platform is well-designed and very stable, and the customer service is excellent. however, a couple very annoying limitation of the EasyLanguage which made things that should have been easy to program, annoyingly difficult)

During my playing around with TradeStation, I decided to translate the key concepts of my discretionary methods into a mechanical system, using mostly static parameters and only a single dynamic parameter. Much to my suprise, the results are consistently better than my discretionary results, which has made me rethink my original assumptions.

At this point, I am trading both systems ("for real" as they say) and curious to see how they compare over the next six months.

My conclusions at this point are:

* there is a substantial screw up factor in discretionary trading. Even if you are consistently profitable and have a solid trading strategy, and taking all the necessary precautions, you are messing yourself up enough to cause a dent
* A mechanical system can indeed work over the long term ...
* Automated backtesting (using Tradestation or similiar) is excellent practice regardless of what kind of trader you are. The process of tweaking your system makes apparent certain aspects of the market that may be more difficult to see if you are not looking at the data summary in front of you

That's what I don't get what is the discretionary part in trading if all
Our decisions are based on patterns we see in price and or order flow
So couldn't for ie a order flow trader trade the same order flow patterns
Mech instead of trying to trade them through feel/ discretionary
Which if true could any one trade any ones system profitably if they can spot the patterns
/setups mech, where is the skill for traders, isn't it just remembering
What the patterns look like in price and or order flow and staying calm
Or am I missing something, couldn't a four yr old do it in a sense?

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  #10 (permalink)
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nightshade View Post
That's what I don't get what is the discretionary part in trading if all
Our decisions are based on patterns we see in price and or order flow
So couldn't for ie a order flow trader trade the same order flow patterns
Mech instead of trying to trade them through feel/ discretionary
Which if true could any one trade any ones system profitably if they can spot the patterns
/setups mech, where is the skill for traders, isn't it just remembering
What the patterns look like in price and or order flow and staying calm
Or am I missing something, couldn't a four yr old do it in a sense?

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.

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