Understood, but not my approach. Unless I know the expectancy of a particular setup, I'm not taking it. If I notice a new phenomenon in the market, I go back and see how often that phenomenon happened before, and how profitable it would have been to trade it, otherwise, I consider it a random phenomenon, and I don't trade randomness. If it happened 6 times in the past 3 years, it's not statistically significant enough for me to trade, I still consider it random. It it happens in a market environment I've never seen before, it is outside of my comfort zone. During the last flash crash, I saw dozens of opportunities to enter the market, but I did not, because that is not the market environment I am use to trading.
I even program such market environments in my indicators, for instance, if the CL starts printing range bars that are less then 3 seconds apart, my code ignores any signal that happens on those bars, because that is not the usual market environment I trade.
I understand and appreciate all your comments on mechanical trading vs. discretionary.
One other issue here from my perspective: a lot of my "discretionary" trading decisions are really mechanical, but not in a way I would be able to easily program a computer to recognize. By that I mean, patterns that are easily apparent to the human eye, but hard to distill to an objective set of rules.
Take for instance the concept of the "double bottom." It is easy to look at a chart, see a prominent swing low earlier in a day, and then make note of that level the next time it is approached. If price bounces near that level, you might be on guard of a potential double bottom / hold-of-support situation, and be less inclined to short that bounce even if your mechanical system would normally say to short. There's a good example of that today, around 11950 on YM. Initial swing low established around 9:40 ET, then a subsequent retest around 10:30. Without that prior swing low at the same level, I would have expected the downtrend at 10:30 to go further.
I could define an objective rule to capture this situation, but wouldn't know how to tell a computer when to recognize what level to use as the "double bottom" zone. How many bars back do you look? How do you define the concept of "swing low"? What exceptions do you build in? How many ticks can price overshoot/undershoot and still be considered a valid retest of that level? Etc. It's obvious to my flesh-and-blood little pattern-seeking mind but complicated when you try to break it down into its component parts. My fear is that if I tried to program a computer to recognize what I can see intuitively I'd create some "Frankenstein" that goes around taking completely nonsensical trades.
That is the biggest ostacle to automated trading, coding properly. There are certain methods that just do not lend themselves well to automated trading. That's why I can't autotrade my method (and I have tried), because it is very visual and does not look at concrete numbers, it just does not lend itself well to autotrading.
Yes, I have no problem explaining this. In theory, from a discipline perspective there should be no difference between automated and discretionary when it comes to the number of contracts.
Trader have what I call a "perceived opportunity" where traders get to trade a larger number of contracts when they think a market "has to" do something, whether rebound or retrace after a big move. In essence, they would step outside their trading comfort or risk capital, all in the order to gain or make back losses.
Also, traders would rather get stopped out than miss something they see as a high probability trade.
Automation does not have this, period. Automation rarely change contracts and needles to say does not have price perceptions where something "has to" happen.
I hope this explanation makes sense.
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Last edited by mattz; June 17th, 2011 at 05:45 PM.
The two subjects of the title aren't mutually exclusive imo. One can be mechanical AND be discretionary. The only thing that matters, is if that discretionary trader can recognize some pattern, or pa, or slope of some indicator in a completely non-ambiguous fashion.
That trader could then trade that pa every time the opportunity presents itself. In that regard, he is being mechanical with what appears on the surface to be a discretionary event.
What if while trading, the trader tells himself that the pattern he is seeing just barely falls outside of acceptable parameters, and the trader immediately recognizes it as such? Would that be breaking the rules?