A lot of successful discretionary traders have literally no idea why they suddenly have a hunch about a trade or price turn. I have seen this a few times... A friend of mine is like "This stock is at such and such RSI level at this high! It's going to drop..." He makes the trade, and the stock drops like predicted.
Now, I went back into sierra to run a backtest to see if there is any correlation of that RSI level to better than 50% odds of short to medium term pullbacks in price at new highs at that RSI level... There was no reliable correlation in back-testing! Heck, it was a 60% loser with a 2% stop/2% take profit.
So, what is actually going on here? Peoples subconscious is actually processing a sh*tload of information... And when they get a hunch or their gut tells them to make a trade... They have to logicalize it in their conscious brain before they let themselves make the trade. I see the same thing with a lot of people that use news... "Oh, bad news... But price is rising, bullish... Buy buy buy!" or "Oh, good news! And price is reacting well... Buy buy buy!".
It's the same thing with people and their own styles of trendlines, fans, etc... Most of the time these are just giving people visual reference points, and their trades are for reasons they don't even consciously know.
So, how do I personally solve if something is real or just a logical excuse for making a subconscious decision? I go in and program and backtest to see if I can mathematically prove there is anything statistically significant.
But, what are a lot of successful discretionary traders or discretionary technical traders actually using to make their trading decisions if their conscious logical mind is just logicalizing one thing to allow for an action? They are using everything... They are using their memory of different news events, market behavior before/after those events, their memory of market behavior at this sentiment level, and how price being above/below different moving averages and at certain levels of overbought/oversold also changes market behavior during news releases, etc etc etc... Their brain is processing more experience than your conscious brain can imagine.
Reminds me of stories about a trader who dreamed how price would move the next day and what levels it would hit... He told some people about the dream... And it happened exactly as he dreamed it, yet he didn't trade because his conscious mind wouldn't accept the subconscious solution.
I mean, look at how programmers work. If I can't solve a problem... I sleep on it, and usually the next morning I have the solution!
I had a similar thing with a friend, he was making something like 100%/year, with what supposed to be a simple method. I coded his method, and the backtest was showing poor results.
I chatted a lot with guy, and after some time realized that the simple rules were not enough, there was always another thing which was involved : another instrument was not in sync, or a news as coming, or the latest PA was not good, and so on.
The guy was not conscious of all the underlying parameters which were helping him to enter or exit, but something else was telling him if the other parameters were in sync with his main signal.
Usually in trading, those who know don't talk, and those who talk don't know. (Al Brooks)
success requires no deodorant! (Sun Tzu)
I know a few people who "always" seem to be right on their market calls. That is, they tell me when they nailed a certain trade or certain market downturn. I get the impression they are very successful market timers and therefore very successful traders. I try to program whatever they tell me, but like the OP, most of their "emthods" are only 50/50 at best.
Still, I then get depressed, because I cannot "call" the market like they apparently can.
THEN, it dawns on me: I only hear from these people when they make the right calls. I don't hear about all the wrong calls they make.
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The following user says Thank You to kevinkdog for this post:
I think for most really good traders the answer lies somewhere in the middle of these two posts.
Speaking from experience, I've not been able to duplicate my discretionary trading performance in an automated system. So I stopped trying. I changed the entire logic of my automated approach so it is not mimicking my discretionary method, but instead is doing things I cannot do as a discretionary trader.
That said, I still believe that if you cannot make consistent money as a discretionary trader then the chances of you doing so as an automated trader are near zero. So there is a lot of experience that carries over from one to the other, but I would not recommend simply trying to automate a discretionary method.
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The following 2 users say Thank You to Big Mike for this post:
I played around with automation but it is simply too hard to do what I do without full on artificial intelligence. You need a program that can recognize news events, parabolic movement vs rounding, and even the effect of future news events on the current market conditions... Eg, like how the jobs report starts increasing range and volatility the day before the news release.
I did manage to create a couple automated strategies that made money, but I would only turn them on discretionarily if conditions looked optimal and I expected them to stay optimal. LoL...
Acceleration toward the end of a trend versus steady deceleration and exhaustion of buyers or sellers. One of the reasons I like the S&P 500... Moves mostly end rounded, and not with parabolic blow-off.
The following user says Thank You to MedianVelocity for this post: