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Mechanical trading vs. discretionary trading
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Mechanical trading vs. discretionary trading

  #41 (permalink)
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Yes, but as a human, how many times can you resist those trades that are 'just outside acceptable parameters'?

It's only a matter of time before you get the urge and commit.

Every discretionary trader is going to break their rules.

However, the winning trader will break their rules less often than the losing trader.

I'm a discretionary trader btw although I've written a lot of code for high probability trades.
I've never programmed a bot to make trades for me.

I don't mind missing out on trades that fit my rules. I don't enter sometimes because
the market isn't black and white to me. If the trade I don't enter ends up being a nice winner, I'm okay with that. There's always more.

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  #42 (permalink)
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Massive l View Post
Yes, but as a human, how many times can you resist those trades that are 'just outside acceptable parameters'?

It's only a matter of time before you get the urge and commit.

Every discretionary trader is going to break their rules.

However, the winning trader will break their rules less often than the losing trader.

Oh ya, for sure. One can 'choose' to break the rules.

I was simply saying that I think it is possible for a trader to be mechanical with deployment of a discretionary method.

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  #43 (permalink)
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Fair enough. I agree with your point.

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  #44 (permalink)
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worldwary View Post

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.

Discretionary and auto traders develop their strategies in the same manner.

Every strategy that has a perceived edge is based upon historical performance/experiences. You're simply basing your supposition that you can make money by predicting market actions based upon previous experience.

You observe a certain event, and after numerous occurrences, you decide that it's a relevant pattern. From that point, it's simply a matter of calculating the expectation with a set of input parameters (i.e. slippage, commission, profit/loss, etc).

even if you were to simply execute trial/error while trading live, you're still developing an edge that you'll apply to future trades and that is historical or past performance based.

All trading is speculation and supposition.

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  #45 (permalink)
Fortitudo et Honor
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Again,

I think there's some misconceptions or misapplications of the word "backtesting."

Obviously there's a spectrum of effectiveness.

When I backtest, I compare the backtest to forward simulation and live forward.

That way I can guage over given time periods, how my backtest "translates" to sim, how my sim translates to live and how my backtest translates to live.

You can do this with just about every performance metric (P/L factor, ratios, win%, drawdown, etc).

If I see a 47% win rate in backtest, and observe a 49% rate for forward sim and then observe a 46% win rate (concurrent with sim and retroactive with backtest), then I can start drawing comparisons and developing confidence intervals about the expectation.

I can then take that "translation" and apply it (with a degree of error and confidence) to other time periods that I haven't traded live.

If you're discretionary trading and you're altering your rules AT ALL, then this type of analysis is useless. Changing ANYTHING nullifies the whole concept.

I think some of you guys have this perception that auto guys write a program, backtest it once, see a black number and pull the trigger on live trading. That may be how some other guys do it....but not everyone operates that way.

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  #46 (permalink)
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One of the problems with discretionary trading is that it would take a life time to manually test the number of automated strategies I can back test and forward test in a weekend.

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  #47 (permalink)
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Arpad View Post
May I assume that you are a successful discretionary trader who consistently makes money?
I have to assume even you have some patterns on which you react. So why don’t you automate your patterns and methods?

If you say those can’t be automated because there is some degree of gut feelings involved, I think uh-uh, warning… Should a serious trader, who strives for consistent profits, base his trading decisions on gut feelings if he can’t describe heuristics behind them? If there are observations behind those, then they also could be coded to run automatically.

Please correct me if I’m wrong.


So why wouldn’t you just modify the code of that not so smart bot in order not to take those trades that you wouldn’t take as an astute discretionary trader?

Perhaps the better question is - why would you bother?

It would be a mammoth task for many traders to do this. For me, it would take possibly a year to define, code, refine this and then I could never guarantee the program would 'think' like me. All for what? To do something I can do anyway but have the chance that a shift in the markets would have me re-coding it all instead of re-thinking it?

I could probably write a program to drive a car. It would also take many years and I'd never fully trust it. One of my mentors once put it like this:

"Let's say you are in a car at a junction. There's a car coming at you and you feel you have time to pull out in front without causing that car to slow down"

Now - we can all do this. This is because repetition of an activity causes it to become second nature. When you are in the car, you don't think "That car is 600 metres away, travelling at 56kmh, my car can accelerate to 56kph withing 6 seconds and therefore I have enough time to go". That's a set of rules. That is how you would mechanically drive a care but nobody drives that way, except Rain Man.

So to trading, especially day trading. Are we Rain Men who need to go through the same mechanical process as when we are beginners, or will some of this become second nature? It seems most people think that trading isn't a skill you can become adept at just like driving, tennis, golf or any other skill we learn.

I find this most odd.

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  #48 (permalink)
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Quoting 
"Let's say you are in a car at a junction. There's a car coming at you and you feel you have time to pull out in front without causing that car to slow down"

]
You are from the old school and I think that people like you will never have a break, because they don't have imagination and cannot invent or even adapt to the changing world.
There are traders, maybe more old school than you, who still trade with a pencil and paper. You may laugh at them, but you're exactly like them.
To your example I just want to point that airplanes are already flying on autopilot. I bet that when this was invented you gave the same statement of how ridiculous it is.
And doesn't matter what you say the cars are going in the same direction.
Now about trading this is different for now. It is still too difficult to develop adapting bots, but it will happen.
As for now there are advantages and disadvantages in each type of trading, and they were mentioned here, so try to think more progressively. I know the saying "You can't teach old dog new tricks", but in this world when you compete with new dogs you have to.

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  #49 (permalink)
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DionysusToast View Post
Perhaps the better question is - why would you bother?

It would be a mammoth task for many traders to do this. For me, it would take possibly a year to define, code, refine this and then I could never guarantee the program would 'think' like me. All for what? To do something I can do anyway but have the chance that a shift in the markets would have me re-coding it all instead of re-thinking it?

I could probably write a program to drive a car. It would also take many years and I'd never fully trust it. One of my mentors once put it like this:

"Let's say you are in a car at a junction. There's a car coming at you and you feel you have time to pull out in front without causing that car to slow down"

Now - we can all do this. This is because repetition of an activity causes it to become second nature. When you are in the car, you don't think "That car is 600 metres away, travelling at 56kmh, my car can accelerate to 56kph withing 6 seconds and therefore I have enough time to go". That's a set of rules. That is how you would mechanically drive a care but nobody drives that way, except Rain Man.

So to trading, especially day trading. Are we Rain Men who need to go through the same mechanical process as when we are beginners, or will some of this become second nature? It seems most people think that trading isn't a skill you can become adept at just like driving, tennis, golf or any other skill we learn.

I find this most odd.

I am in the mechanical camp, but I have to agree with you here. If you are not a programmer, and have no inclination to it, there's no reason you should try to program your methodology.

But I believe you should write the rules down in detail, and understand how your method works, why it works, when it works. During the raging bull market in the dot com era, many traders were making money hand over fist. Once the tech bubble burst, they lost everything, and could not make a dime to save their life. They mistook the nature of a raging bull market, and thought it was their natural trading ability and skill.

I do believe there are successful traders who have learned the skill of trading, or have an innate ability for the art of trading. But, I have to say that those guys are few and far in between. The problem is, every newby trader who opens an account thinks they will be one of those traders with this natural ability. Guess what, 95% of them don't, and 95% of them fail!

The problem with trading from that intangible, unidentified, ability, or skill, is that if you haven't broken down your method down to it's core, and don't know exactly the reason why it works, then when it stops working for some reason or another, then you are screwed, because you have no idea how to fix it.

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  #50 (permalink)
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Massive l View Post
Yes, but as a human, how many times can you resist those trades that are 'just outside acceptable parameters'?

It's only a matter of time before you get the urge and commit.

Every discretionary trader is going to break their rules.

However, the winning trader will break their rules less often than the losing trader.


The winning trader "breaks" his rules at the right times...

It's funny how those trades might be the most profitable ones too....

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