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why computers can't replace discretionary price action traders?
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why computers can't replace discretionary price action traders?

  #11 (permalink)
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Seahn View Post
Automated vs discretionary trading is like an arms race or evolution. Advances in automated trading will always result in changes to the markets so that human discretion will maintain an edge.

It must be that way in a free auction market because if automated systems became so good as to win all the time (or a very high percentage) there would be no one taking the other side of the trade (people do not give their money away). Instead the markets will change to take the automated systems' edge away.

Depends on what one means by "free". Theoretically, either party always has the freedom to walk away from the negotiation, but this isn't the way it works in reality. People give away their money every day, whether in the market or not. And if markets changed to take automated systems' edge away, all the casinos would close tomorrow.

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  #12 (permalink)
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I study behavioral economics and human cognition - not going to claim I'm "correct" but here's some possibilities nonetheless.

Economics is not a precision science; ask the Nobel Prize winners who wreak havoc on micro and macro economies with their "precision" ideas.

So what is it? Behavior.

That's it. Behavior is defined as "the way in which an animal or person acts in response to a particular situation or stimulus."

Pretend the instrument your trading is an animal. It has a behavior about it; it get's happy, sad, surprised, disgusted. IF something happens, the animal reacts. Now think, how many stimuli are happening all at once? Infinite.

We humans are discretionary with how we act around other animals (Discretion is defined "the freedom to decide what should be done in a particular situation."

We decide how were going to interact with that animal based on it's behavior. We're excellent at it, evolutionarily speaking.

Who isn't good at it? Computers. Why? We program them, and we're not really sure why or how we make behavioral decisions ourselves - so how could we program something else to?

The reason we think we make decisions, isn't how we actually make decisions. We don't make decisions based on logic, we make decisions based on emotions - on behavior. Limbic brain stuff, not the logic based pre-frontal cortex.

Look at AI - it can't mimic us accurately because it's based on logic. A computer isn't making a decision while simultaneously trying to remember what it needs to get at the store, if that girl smiled at it because she thinks it's cute, whether or not it should loan money to it's drug abusing brother, and whether or not that decision it made back in third grade was a good idea or not.

So who controls the market? Humans. All making decisions that first go through the emotional filter, intuition and gut feelings and whatnot.

Think of the market as the ultimate culmination of human emotional decision making as a measurable output.

If AI replaced humans completely, 100%, it wouldn't act the same way. Who knows, maybe it would just be a flat line with imperceptible microscopic chop.

Sorry for the rant, this is a forum post, not a school-book LOL.

-Jimmy
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  #13 (permalink)
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I think a key factor in the success of discretionary traders is the ability to empathize with other traders (automated or not) in that marketplace and anticipate what they're trying to accomplish. Successful trading algorithms still require a human programmer to come up with a hypothesis to test and eventually trade, otherwise they'd just be curve fitting.

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conorcoen View Post
I think a key factor in the success of discretionary traders is the ability to empathize with other traders (automated or not) in that marketplace and anticipate what they're trying to accomplish. Successful trading algorithms still require a human programmer to come up with a hypothesis to test and eventually trade, otherwise they'd just be curve fitting.

This is an awesome point. Added to my notebook. Thanks!

-Jimmy
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FABRICATORX View Post
I study behavioral economics and human cognition - not going to claim I'm "correct" but here's some possibilities nonetheless.

Economics is not a precision science; ask the Nobel Prize winners who wreak havoc on micro and macro economies with their "precision" ideas.

So what is it? Behavior.. . .

In the aggregate, however, the "why" doesn't matter. All that matters is whether price goes up or down and by how much.

Not everyone is an emotional trader. Those who are not can watch those who trade emotionally and exploit their behavior. A computer is unemotional. To program it to trade "emotionally" would defeat the purpose of programming it in the first place. I don't enjoy P&F myself, but I can see where it would be a very interesting path to follow for those who are interested in trading more like a computer might.

Of course, if computers took over all trading, price wouldn't move much. Maybe we'd go back to the old days of buying for dividends.

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  #16 (permalink)
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rocktrader View Post
just throwing more CPU power fails to work in certain areas, a day to day example is encryption and decryption.
(see: P vs NP problem in computing). I suspect there is one such component in discretionary trading, if there is no such component well automation is straight forward, but am not able to put my finger on our suspected component.

There's going to be a point in the future where AI leads to a singularity that redesigns itself at some exponential rate. Perhaps that's where some new quantum discovery is made that solves P vs NP. This sort of belief isn't exactly "sci fi" anymore. The likes of Google, Intel, Gates, Musk, Hawking have all raised concerns about it. There's loads of credible/ not so credible discussion about it everywhere these days.

In the not so distant future there's going to be a closer relationship between us and machines, and it's going to be more of an integration than a co-existence( look at the smart phone revolution over the last decade, and now the move into wearable tech( iwatch), with commercial application( Hololens)- Fast forward a couple of decades and the computational power of today's intel chips could be the size of single blood cell. So it's not like we're going to be carrying our phones around in our pocket anymore, it will be some kind of bio-integrated device...

It might not be that "computers" replace discretionary traders, however that discretionary traders adapt to become more quantified and make real time decisions aided by the computational power they now possess.

"Free markets work because they allow people to be lucky, thanks to aggressive trial and error, not by giving rewards or incentives for skill. The strategy is, then, to tinker as much as possible and try to collect as many Black Swan opportunities as you can"
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Neo1 View Post
There's going to be a point in the future where AI leads to a singularity that redesigns itself at some exponential rate. Perhaps that's where some new quantum discovery is made that solves P vs NP. This sort of belief isn't exactly "sci fi" anymore. The likes of Google, Intel, Gates, Musk, Hawking have all raised concerns about it. There's loads of credible/ not so credible discussion about it everywhere these days.

In the not so distant future there's going to be a closer relationship between us and machines, and it's going to be more of an integration than a co-existence( look at the smart phone revolution over the last decade, and now the move into wearable tech( iwatch), with commercial application( Hololens)- Fast forward a couple of decades and the computational power of today's intel chips could be the size of single blood cell. So it's not like we're going to be carrying our phones around in our pocket anymore, it will be some kind of bio-integrated device...

It might not be that "computers" replace discretionary traders, however that discretionary traders adapt to become more quantified and make real time decisions aided by the computational power they now possess.

Latest estimates are 15 years

Just imagine: politicians living forever . . .

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I think an important point that has not been made here is that the vast majority of institutional algos are NOT looking at "price candles". They are reading completely different data and exploiting different phenomenon. The price candle itself and their patterns are irrelevant to them. That is not the same as saying price is irrelevant, just saying the way in which humans have aggregated that information into time or volume based candles is irrelevant. The underlying trades of course are what they are looking at level 2 and tick level data, unfiltered. Then doing some pre processing, calculations, or transformation in order to make forecasts, detect arbitrage opportunities, pricing of derivatives, etc etc... It is like comparing apples and oranges.

If you are talking about using algos to beat price action / candle reading, sure it is possible for a human to beat an algo. Although an algo with always be more consistent, but less flexible. where as a human is the reverse, less consistent but more flexible. But if you are looking for out performance, who makes more returns in 2014. The algos beat the human discretionary by a large margin. I don't remember the exact figures, but i can look it up on my Bloomberg if you guys want citation and exact figures.

In my mind, the battle is not a competition based on who does better at a single strategy E.G. Price action trading. It is a competition on generating out sized alpha for a given risk allocation. What that strategy is, is it human or algo, or any other "dividing line" is superficial.

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treydog999 View Post
I think an important point that has not been made here is that the vast majority of institutional algos are NOT looking at "price candles". They are reading completely different data and exploiting different phenomenon. The price candle itself and their patterns are irrelevant to them. That is not the same as saying price is irrelevant, just saying the way in which humans have aggregated that information into time or volume based candles is irrelevant. The underlying trades of course are what they are looking at level 2 and tick level data, unfiltered. Then doing some pre processing, calculations, or transformation in order to make forecasts, detect arbitrage opportunities, pricing of derivatives, etc etc... It is like comparing apples and oranges.

If you are talking about using algos to beat price action / candle reading, sure it is possible for a human to beat an algo. Although an algo with always be more consistent, but less flexible. where as a human is the reverse, less consistent but more flexible. But if you are looking for out performance, who makes more returns in 2014. The algos beat the human discretionary by a large margin. I don't remember the exact figures, but i can look it up on my Bloomberg if you guys want citation and exact figures.

In my mind, the battle is not a competition based on who does better at a single strategy E.G. Price action trading. It is a competition on generating out sized alpha for a given risk allocation. What that strategy is, is it human or algo, or any other "dividing line" is superficial.

I agree that how we illustrate price movement is irrelevant, as I've said elsewhere. Whether weekly or hourly or 1m, all charts are tick charts anyway. Those who want to become proficient "price action" traders must come to grips with this at some point or resign themselves to a journeyman's approach. And I'd expect algos to outperform any trader, discretionary or otherwise, as discipline and hesitancy just don't come up. 1 or 0.

There are two chief propositions in the OP, that PAT can't be "coded away" and that it might be possible to come up with programs that replace human tape readers. I see no reason why PAT can't be coded away if one begins with what PAT is: the movement of ticks up or down, without regard for how that movement is illustrated. If that is the case, then there is no reason why computers can't replace human tape readers.

Much of this depends on where one finds his fun. The idea of automating my trading is of no interest to me because it wouldn't be any fun. But that doesn't mean that it can't be done. I suspect that those who love automation and have as much or more fun with it than discretionary traders can't imagine why anyone would want to do it any other way, not unlike "arranged marriage" advocates vs those who spend (waste?) their lives looking for Mr. or Ms. Right. Those who are happy with where they are often cannot imagine any other way of getting there than the one they chose (assuming that they are not exaggerating the element of choice), so eventually it all comes down to results. The stick in the spokes, however, is defining just what it is that one is comparing, e.g., "price action". One can get past that by comparing the results achieved by a computer without regard for the program and comparing it to the results achieved by a human trader without regard for what he does or how he does it. But the eventual winner shouldn't come as a surprise.

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Poker game is almost solved using CFR+ (Counter Factual Regret Minimization).

The surprising thing about CFR algo is perfect defense game with no component of offensive aggressiveness. Perfect defense is the NASH equilibrium. CFR makes money exploiting the mistakes, in long run it's guaranteed to win. Playing aggressive game has trade off of opening up for exploitation. CFR completely avoids this aggressive route but readily exploits other players' aggressiveness-exploitation-tradeoff.

Markets are simply auction process with components of poker game.

An algo can atmost mature to play perfect defense, if it want to survive all seasons of markets.

Any other route of modelling and optimization will replay the Long Term Capital stories.

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