Mechanical trading vs. discretionary trading - Traders Hideout | futures io social day trading
futures io futures trading


Mechanical trading vs. discretionary trading
Updated: Views / Replies:11,045 / 83
Created: by Arpad Attachments:1

Welcome to futures io.

(If you already have an account, login at the top of the page)

futures io is the largest futures trading community on the planet, with over 90,000 members. At futures io, our goal has always been and always will be to create a friendly, positive, forward-thinking community where members can openly share and discuss everything the world of trading has to offer. The community is one of the friendliest you will find on any subject, with members going out of their way to help others. Some of the primary differences between futures io and other trading sites revolve around the standards of our community. Those standards include a code of conduct for our members, as well as extremely high standards that govern which partners we do business with, and which products or services we recommend to our members.

At futures io, our focus is on quality education. No hype, gimmicks, or secret sauce. The truth is: trading is hard. To succeed, you need to surround yourself with the right support system, educational content, and trading mentors Ė all of which you can find on futures io, utilizing our social trading environment.

With futures io, you can find honest trading reviews on brokers, trading rooms, indicator packages, trading strategies, and much more. Our trading review process is highly moderated to ensure that only genuine users are allowed, so you donít need to worry about fake reviews.

We are fundamentally different than most other trading sites:
  • We are here to help. Just let us know what you need.
  • We work extremely hard to keep things positive in our community.
  • We do not tolerate rude behavior, trolling, or vendors advertising in posts.
  • We firmly believe in and encourage sharing. The holy grail is within you, we can help you find it.
  • We expect our members to participate and become a part of the community. Help yourself by helping others.

You'll need to register in order to view the content of the threads and start contributing to our community.  It's free and simple.

-- Big Mike, Site Administrator

Reply
 1  
 
Thread Tools Search this Thread
 

Mechanical trading vs. discretionary trading

  #21 (permalink)
Elite Member
Williamsburg, VA
 
Futures Experience: Intermediate
Platform: ThinkorSwim
Favorite Futures: Stocks
 
worldwary's Avatar
 
Posts: 523 since Mar 2010
Thanks: 259 given, 788 received


Arpad View Post
I thought that if you managed to recognize the opportunities and made up your plan that is working good for managing your trades, so when this is done you could code your method to make it a completely automated mechanical system. I know that emotional attachment is not good, and hesitation or second-guessing your proven rules could be harmful. So why not code your system?

For me personally as a discretionary trader, some aspects of my trading would be impossible to code, others might be possible but would be difficult.

An example of something that would be impossible to code: Developing a directional bias following some important macro development that has the potential to spark a significant shift in market psychology. A QE2 announcement or the like. These are one-off events and need to be filtered through human intelligence.

An example of something that would be difficult to code: Trading a breakout beyond an "important" support/resistance level, while avoiding breakout trades at levels that are less important. What levels are important? How many bars do you need to look back, on what timeframes? How many times must a level have been retested? Etc. All these questions vary with context and can be apparent to a pattern-seeking flesh-and-blood brain but are very difficult to distill down to a set of objective rules that should be followed religiously every time they occur.

Take for example those security steps you need to take sometimes when filling out an online form, where you're shown a series of letters that are altered in some way and need to accurately identify the letters before you're allowed to proceed. A human brain immediately recognizes the letters for what they are, but a computer cannot.

One reason why I'm a discretionary trader is because most of the patterns I trade are patterns I can recognize intuitively but would have difficulty making a trading algorithm recognize as successfully. Patterns have fuzzy edges sometimes I guess you could say.

Reply With Quote
The following 2 users say Thank You to worldwary for this post:
 
  #22 (permalink)
Market Wizard
Boca Raton
 
Futures Experience: Advanced
Platform: Variety
Broker/Data: Optimus Futures, LLC
Favorite Futures: Futures
 
mattz's Avatar
 
Posts: 2,059 since Sep 2010
Thanks: 1,933 given, 2,782 received
Forum Reputation: Legendary

I would like to add my perspective on automated/algorithmic/mechanical trading(all auto executed system solutions for the sake of this thread) versus discretionary trading (where you manually have to execute your initial trade).

In essence, I want share my experience dealing with thousands of traders over the years and at the same time shed some light on the emotional side of the methods discussed.

I will divide my reply into 2 sections:

1) Is it easier to trade an automated solution versus discretionary trading?
2) What gives you better odds...discretionary of automated?

Automated Versus Discretionary

It is not easier to trade an auto executed solution, and I am sorry to disappoint many discretionary trader who think of switching. The "emotions" don't just go away when you see a system execute, because you deal with the following:
  • A trader will see his/her mechanical system take trades that are counter intuitive
  • A trader will see his/her method take losing trades one after another (hard to see..when you are passive)
  • A trader will "suffer" while seeing hid/her system is going through a drawdown while you are doubting if it's still valid
  • A trader will be tempted to take profits and you can't (because then you are not trading your system or method)
  • lastly...a trader might start trading his/her system in the worst period...and that's just Murphy's. Also, it can be flat from a performance perspective for a very long time because of lack of activity (no signal).

Many traders want to switch to automated solutions because they think that their their emotions are in their way.
Same emotions reincarnate when you trade a purely mechanical systems, whether auto executed or one that obligates you to take a trade. It takes the same mentality to be successful whether trading discretion and/or mechanical system.

I have seen some traders here who have the fear of trading, and many offer them automated solution.
This is not always a solution that helps, and in fact I think that one should exercise some discretionary trading prior to implementing automated or semi automated solutions.
Now to the $64K question: Which one is better...Mechanical or Discretionary?

Before I answer this, please keep in mind that I am aware that many of you are discretionary traders, and would never get into completely mechanical/automated solutions. Also, many discretionary methods could not be automated.

But, I would encourage those that could to automate their systems to do so because of two reasons:
1) You can test your system against the leverage you are about to use. In essence, you can use a small # of contracts or single contracts in your account so you can withstand (potentially) drawdowns. This is one thing I like about the automated solutions: you trade the same # of contracts. This is important from a discipline perspective.
2) In the long run, despite all the things above, an automated solution could provide to be a more disciplined approach . A mechanical solution does not add $$ to losing positions, it does not trade different number of contracts, it does not jump from one market to another, etc.

My reply does not constitute how to build a winning mechanical system, rather some variables that one can take into consideration when deciding.( There is a substantial risk of loss in futures trading).

PM with any questions about optimusfutures (800) 771-6748 (561) 367 8686. THERE IS A SUBSTANTIAL RISK OF LOSS IN FUTURES TRADING.

Last edited by mattz; June 7th, 2011 at 06:36 PM.
Reply With Quote
The following 6 users say Thank You to mattz for this post:
 
  #23 (permalink)
Elite Member
Hungary
 
Futures Experience: Beginner
Platform: N/A
Favorite Futures: Forex
 
Arpad's Avatar
 
Posts: 34 since Dec 2010
Thanks: 145 given, 9 received


Dear @mattz,

Can you elaborate this:

mattz View Post
1) You can test your system against the leverage you are about to use. In essence, you can use a small # of contracts or single contracts in your account so you can withstand (potentially) drawdowns. This is one thing I like about the automated solutions: you trade the same # of contracts. This is important from a discipline perspective.

What is the difference in this regard between automated and discretionary trading?




Thanks,
Arpad

Reply With Quote
 
  #24 (permalink)
Elite Member
Bala, PA, USA
 
Futures Experience: Intermediate
Platform: NinjaTrader
Broker/Data: Mirus, IB
Favorite Futures: SPY, Oil, Euro
 
monpere's Avatar
 
Posts: 1,858 since Jul 2010
Thanks: 300 given, 3,276 received

Every discretionary method, is a mechanical method that has not been coded. Unless you are throwing a dart at the screen to choose your trade, you are probably using a mechanical rule set, whether you realize it or not.

If you ever say, I am going long 'if' the trend is up, you are using a mechanical rule
If you ever say, I am going long 'if' this resistance level is taken out, you are using a mechanical rule
If you ever say, I am going long 'if' price breaks out over this area, you are using a mechanical rule
If you ever say, I am going long 'if' the weekly chart is up, you are using a mechanical rule
If you ever say, I am going long 'if' this trend line is broken, you are using a mechanical rule
If you ever say, I am going long 'if' price bounces off the POC, you are using a mechanical rule
If you ever say, I am going long 'if' there is a double bottom, you are using a mechanical rule
If you ever say, I am going long 'if' there is a gravestone doji here, you are using a mechanical rule
If you ever say, I am going long 'if' the news is good, you are using a mechanical rule

If you always use the word 'if' in order to make a decision to enter the market, you are using a mechanical method.

If you don't use the word 'if' in every decision you make to enter the market, you are not trading, you are gambling.

If you say, 'I feel the market is going to go up' and I ask you why, and you point to the chart to give me an answer, you have identified a mechanical rule(s). If you tell me because I have funny feeling in my left bunion, you are gambling.

An mechanical system is a system with an identified finite rule set. A discretionary trader just thinks he doesn't have a finite rule set. I challenge every discretionary trader to write the reason(s) why they took every single trade they took for a whole week, or just markup the trades, and at the end of the week go back, and write down why you took every trade. At the end of the week, you will realize you have a finite number of 'if' s that you use to enter the market. If that is the case, you have a mechanical rule set. If that's not the case, you are gambling.


Last edited by monpere; June 17th, 2011 at 05:42 AM.
Reply With Quote
The following user says Thank You to monpere for this post:
 
  #25 (permalink)
Elite Member
Williamsburg, VA
 
Futures Experience: Intermediate
Platform: ThinkorSwim
Favorite Futures: Stocks
 
worldwary's Avatar
 
Posts: 523 since Mar 2010
Thanks: 259 given, 788 received


monpere View Post
An mechanical system is a system with an identified finite rule set. A discretionary trader just thinks he doesn't have a finite rule set. I challenge every discretionary trader to write the reason(s) why they took every single trade they took for a whole week, or just markup the trades, and at the end of the week go back, and write down why you took every trade. At the end of the week, you will realize you have a finite number of 'if' s that you use to enter the market. If that is the case, you have a mechanical rule set. If that's not the case, you are gambling.

Perhaps one difference is that a discretionary trader may not take a trade every time conditions X, Y and Z present themselves. "Mechanical" implies that the taking every trade, every time the conditions present themselves.

A discretionary trader can in effect create new "rules" or exceptions on the fly; a mechanical system would not do this.

-----------------------------------------------------

"If you must forecast, forecast often."

-- Edgar Fiedler
Reply With Quote
 
  #26 (permalink)
Fortitudo et Honor
Austin, TX
 
Futures Experience: Advanced
Platform: TradeStation
Favorite Futures: Futures
 
Posts: 882 since Mar 2011
Thanks: 128 given, 703 received


worldwary View Post

Perhaps one difference is that a discretionary trader may not take a trade every time conditions X, Y and Z present themselves. "Mechanical" implies that the taking every trade, every time the conditions present themselves.

A discretionary trader can in effect create new "rules" or exceptions on the fly; a mechanical system would not do this.

This is EXACTLY why I don't trade discretionary.

it's like shooting from the half court line (with plenty of time on the clock). To the novice, if you make it, you're a genius. If you miss it, you're an idiot. To the experienced (aka your coach) even if you make it, he pulls you aside and says "don't ever do that again."

If you're altering your trading habits based on your "gut" or some nebulous, intangible or otherwise unidentified reason....

Then you are NOT trading based upon rules. You're trading by the seat of your pants. Trading on the fly. Trading by your gut. Whatever you want to call it.

And even though you could argue, that staying out of the market means not losing money (it also may mean leaving profits on the table.) You could argue getting into a trade, when the market is hot, may turn out positively (then again, you may get your *** burned too).

Rules based trading removes the fear or hesitance of entry. It removes the eagerness or zelousy of entry. It removes the fear or greed of exit.

If you can achieve RULES BASED trading with a discretionary approach....my hat goes off to you.

If you're trading in a method which I think you just described, you're either not making as much money as you could, or worse yet, you're setting yourself up to sing the blues.

Reply With Quote
 
  #27 (permalink)
Fortitudo et Honor
Austin, TX
 
Futures Experience: Advanced
Platform: TradeStation
Favorite Futures: Futures
 
Posts: 882 since Mar 2011
Thanks: 128 given, 703 received

I think there are still some major misconceptions about effective auto trading.

Effective autotrading isn't using a "bot."

It's not rigid. You should consistently be evaluating your strategy live, vs, your researched results in sim (both forward and backtest). Even the most simple adjustments (i.e. profit/loss ratio) can have very drastic results on a strategies performance.

What if the market changes. What if there's a fundamental long term change to the market (i.e. when the marginal requirement for some commodities went up, it had an ostensible reduction in volume, which also translates into an ostensible effect on daily range, average range, etc).

Auto trading isn't some rigid, plug and play and walk away concept.

I think in it's effective form, it's basically the SAME thing a discretionary guy is doing, only it's instructing a rational/emotionless medium to execute it for you.

The best way to think of it is like this....

What if you could communicate and translate your trading strategy to a guy who could execute your trading for you?

This guy, is an absolute machine. He never gets tired. He never gets distracted. He doesn't have a phone to worry about, or text, or tv, or kids or a wife. He has no other duty than to trade for you. It's all he thinks about. He can also think and calculate billions of times faster than you. This allows you to hand him instructions which involve very sophisticated calculations, both for trade setups/entry AND for money management (i.e. very sophisticated aspects like parabolic/hyperbolic trailing stops...multi-tiered stops, scaling in, scaling out).

This guy, he never gets mad when he loses. He never feels invincible when he wins. He's stone cold. When he's in a trade, he sticks to the plan, he doesn't get tempted by the potential for more profit than planned. He doesn't get tempted to stay in a trade too long. He never hesitates when your entry criteria are met. He never hesitates when the exit criteria are met. He can watch the market all day long, with no trades and not become eager to trade ("just to trade").

There's a TON of reasons to use a computer to execute your rules.

Reply With Quote
 
  #28 (permalink)
Fortitudo et Honor
Austin, TX
 
Futures Experience: Advanced
Platform: TradeStation
Favorite Futures: Futures
 
Posts: 882 since Mar 2011
Thanks: 128 given, 703 received

Having said ALL of that, there ARE limitations to auto trading.

Auto trading (for most platforms) leans toward market orders. limit orders present numerous "gotcha" coding difficulties. Partial fills. Basically, it opens up several decision tree possibilities that must also be included in your code. (it can be done, but it's very difficult).

Auto trading challenges and difficulties can push you toward more simplistic methods (which I'm not so sure is a bad thing).

In addition to challenges with limit orders (encouraging market orders), it also encourages "next bar" execution, rather than intrabar. There are several challenges with backtesting, then again, these challenges are present whether you trade discretionary or auto.

Reply With Quote
The following user says Thank You to RM99 for this post:
 
  #29 (permalink)
Elite Member
Bala, PA, USA
 
Futures Experience: Intermediate
Platform: NinjaTrader
Broker/Data: Mirus, IB
Favorite Futures: SPY, Oil, Euro
 
monpere's Avatar
 
Posts: 1,858 since Jul 2010
Thanks: 300 given, 3,276 received


worldwary View Post


Perhaps one difference is that a discretionary trader may not take a trade every time conditions X, Y and Z present themselves. "Mechanical" implies that the taking every trade, every time the conditions present themselves.

A discretionary trader can in effect create new "rules" or exceptions on the fly; a mechanical system would not do this.

If you create rules on the fly, you are gambling.

Reply With Quote
 
  #30 (permalink)
Elite Member
Williamsburg, VA
 
Futures Experience: Intermediate
Platform: ThinkorSwim
Favorite Futures: Stocks
 
worldwary's Avatar
 
Posts: 523 since Mar 2010
Thanks: 259 given, 788 received



monpere View Post
If you create rules on the fly, you are gambling.



True. But you are also gambling if you assume that your mechanical backtesting results are accurately reflective of the future state of the market. Trading is gambling by its nature.

The trick is whether you're able to consistently keep losses small and winners large. If so, you could trade using a Magic 8 Ball as far as I'm concerned. It could be argued that all these trading systems, discretionary or mechanical, are really heuristics designed to override our natural tendency to do the opposite: exit winners early, and hold onto losers in the hope that they'll "turn around." Use whatever method gives you enough confidence to override those natural instincts.

The reason I personally favor discretionary trading is that I've perceived that market conditions change more frequently than some traders appear to assume, in a way that can render a formerly profitable system into a dead loser.

If that's the model of the market you're building from, then the question becomes not, "What set of mechanical rules has worked best, on average, over the last X thousand trading days?", but rather, "What's working now?" And if that's they question you're trying to answer, then of course you will develop new rules in response to changed conditions. Hopefully not totally unfounded rules, but quite possibly without enough of a statistical background to run a comprehensive backtest. If you find, say, a correlation between asset classes that appears to have developed recently due to some issue that's at the forefront of the news, then why not trade it until it stops working? The fact that the correlation is new has no bearing on whether it's working at the moment.

-----------------------------------------------------

"If you must forecast, forecast often."

-- Edgar Fiedler
Reply With Quote
The following user says Thank You to worldwary for this post:

Reply



futures io > > > Mechanical trading vs. discretionary trading

Thread Tools Search this Thread
Search this Thread:

Advanced Search



Upcoming Webinars and Events (4:30PM ET unless noted)

Linda Bradford Raschke: Reading The Tape

Elite only

Adam Grimes: TBA

Elite only

NinjaTrader: TBA

January

Ran Aroussi: TBA

Elite only
     

Similar Threads
Thread Thread Starter Forum Replies Last Post
Building a PC for Discretionary/Automated Trading and Strategy Development nlhaines Tech Support 50 January 13th, 2017 06:18 PM
Use your brain! Mechanical indicator-based systems don't work cunparis Traders Hideout 109 September 30th, 2014 07:49 AM
Multicharts Discretionary - Anybody trading with it? NW27 MultiCharts 35 September 15th, 2011 10:19 PM
Top Tenets of Mechanical Trading shodson Traders Hideout 9 April 29th, 2010 03:00 AM
Webinar Trading Video: Live Trading and Technical Analysis of EuroStoxx 50 max-td Trading Reviews and Vendors 1 March 13th, 2010 07:35 AM


All times are GMT -4. The time now is 11:44 PM.

Copyright © 2017 by futures io, s.a., Av Ricardo J. Alfaro, Century Tower, Panama, +507 833-9432, info@futures.io
All information is for educational use only and is not investment advice.
There is a substantial risk of loss in trading commodity futures, stocks, options and foreign exchange products. Past performance is not indicative of future results.
no new posts
Page generated 2017-12-12 in 0.20 seconds with 40 queries on phoenix via your IP 54.234.255.29