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What occurred to me in reading this is that exactly the same is going to be true if you are a pure discretionary trader (as I am): the market will change character is some way, and the old methods that worked well will stop working. In fact, this does happen all the time, but it changes fairly slowly.
Simple examples are changes from a trending market to a range-bound market, or from a low-volatility, ho-hum market to a fast, high volatility market, and then they all switch back again.
Trading with the mouse and the screen, it may take a while to see this happening, and you may also adjust for it (I think many traders don't, and so things start to go bad for them and they don't know why.) With an automated system, typically a trader will run a long backtest, and it may or may not do well over that time span, but since long periods of time are being surveyed, many different market regimes may be encountered. Or, worse yet, perhaps you don't encounter anything different, and so you go ahead with, for example, a trend-following system that tested out great, but the market now starts to back and fill, and move within ranges. Now the profitable system blows up.
My point is simply that the markets do this, and any type of trading, manual or automated, will need to adapt to these changes. I don't see the challenges as unique to one or the other, but I do see them for both.
So, if a trader could adapt his/her manual trading to these market changes, however they do it, the same trader could, in theory, use the same means to detect/notice/figure-out the changes and adapt their system. Theoretically, anyway.
But I don't see these issues as only for automated systems.
Ideally, some such ability to change would be built into the automated system, but that is "ideally." Would it be better to somehow figure out how to build it in, or is it good enough to just be able to notice, yourself, that the system is going off-track and switch to another one?
I realize that this goes against the rationale that traders usually have for going full auto. But if it's the reality (and I'm not saying it is, just saying if it is,) then it has to be dealt with one way or another.
Just thoughts based on the issues of the thread. I don't do auto trading and don't have the experience to make any real suggestions....
Bob.
When one door closes, another opens.
-- Cervantes, Don Quixote
As a funny coincidence, I just recently changed from using constant volume charts for several years to using time charts in many different timeframes, and my trading immediately improved. It really did.
Was the fact that it was a new change that made the difference? No idea. But I like them better.
No explanations, just an observation....
Bob.
When one door closes, another opens.
-- Cervantes, Don Quixote
On that note, I remember somewhere reading that if the strategy has back to back losses more times than the maximum number it did so in backtest would be a good indication of "marker situation changing". Please correct me if this logic is wrong, I'm yet to investigate this sufficiently.
Now the question is, do we have different strategy ready for the changed situation or we are not going to come out of the shock of our bread and butter strategy not working any more?
Yeah, I know. This kind of things are hard to explain. But with time candles I was a lost soul, now I've got entire market mapping system around volume. It just finally makes sense.
Since I have no relevant experience with automated systems, I don't know the answer.
There are people who have written on the subject. Kevin Davey ( @kevinkdog ) comes to mind. I keep thinking I should read his book, but it's about automated trading, which I have not gotten into. But experienced traders who are into it have spoken well of the book, and I know him from many years on this forum and highly respect his views and experience.
If I were dealing with issues in building and testing/developing an automated system, this is where I would turn first.
Bob.
When one door closes, another opens.
-- Cervantes, Don Quixote
One thing I found after switching from time based charts to tick charts is that bar size must be changed periodically to match volatility. If your account is big nough to trade the increased volatility & risk, the same strategy may work essentially in another time frame. This can be seen visually by adjusting bar size to smooth out whipsaws or tails, and probably algorithmically by measuring for volatility a number of ways. I saw that this last week in a trading range strategy when a 1000 tick chart was showing late entries and bars that were too large to trade effectively in a tight trading range market due to a small range (I believe it was the ES on Wednesday). By changing to 500 tick bars the reversals worked beautifully and the legs were very tradable. But in a more volatile situation for the ES, 500 tick bars would be too small and lead to frequent premature stopouts.
This is when I began to see that for me the answer may be a combination of computer based strategies and visual market analysis do decide when to apply them.
This is an important observation, at least I think so.
In a related sense, I now use time charts (have used tick and volume charts for years), and I have the same experience with them. I will normally sit with a 1-minute chart, sometimes bouncing up to 5 minutes but mostly not, and in slow moving or barely moving periods, will drop down to 30-second or sometimes 10-second bars. (I am a short-term trader, obviously.... but everything I am saying will, I think, apply if you move between 15-minute bars and 4-hour bars -- the market is the same on a small and on a large scale view.) You do have to move a little faster yourself in these smaller scales, but the tiny little nothing moves on a longer chart resolve easily into simple trend moves if you go lower, at least sometimes. When they don't, I just relax and wait for a change.
But as you say, with bigger moves you want to get out of the very short-term bars, because there will be too many pullbacks that you get out on instead of riding out. So there is an element of judgement in deciding how finely to focus. The simplest thing I have found -- note that I am fundamentally a trend trader, even if I'm finding a "trend" on a 10-second chart -- is just to ratchet my bar size up and down and see which perspective gives me the appearance of a tradable move. So I will change often during a typical day.
Bob.
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PS, this up and down scale changing means I can't, and don't, have an always-fixed stop and target of x number of ticks. It depends on what the market is offering, and I'm flexible.
When one door closes, another opens.
-- Cervantes, Don Quixote
Thanks for your thoughtful comments, and thanks for an excellent job as moderator of this forum. Note in my post which you quoted I said I THINK the limitations did not exist AS MUCH with discretionary trading. I believe they do exist with both. The case you mentioned is a good example, as long as the discretionary trader is a visual trader. I believe this is because good discretionary traders can detect changes in the market and often make adjustments, sometimes maybe even subconsciously. I think it is much harder to teach a computer to do it. I have experience with both, and I've risked actual real $$$ in both, but significantly more in discretionary trading. My computer based strategy trading has been more with sim trading, though I've had real money at risk with that, too. I am honest enough to say I have not yet found my real edge in either one. I believe I am close, but honestly, I have felt that way before.
I belive the best individual (not institutional) traders in the world are discretionary traders. I have not been able to get a computer to identify market types as well as I can visually. On the other hand, I cannot execute trades manually nearly as well as I can through automation. Through all the discussions in this post and excellent comments from so many members, I have realized that perhaps for me the answer lies in doing both - training myself to be the best I can be at identifying the type and range of the market at the time, and then activating the proper strategy to capitalize on that market to avoid my psychological pitfalls of overtrading, hesitating on entries, and exiting poorly. These can easily be corrected by computer strategies. I already have these in place, and they test positively as long as they are applied to the right market.
This is what you discretionary traders do all the time, and I believe it is one of the edges which applies to your style of trading. Discretionary traders just learn to control their emotions during the execution and management of the trade, and that is something that I believe a computer can do better than a human.
-- is just to ratchet my bar size up and down and see which perspective gives me the appearance of a tradable move. So I will change often during a typical day.