Combining Mechanical and Discretionary Trading


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03 Mar, 2005

in Getting Started and 1 more

The road to a combined system

If you’re not sure that you can develop your own discretion, you can build up to it by exercising your judgement in a more, shall we say, practical way. For example, before jumping into a trade, see if the price is near a support or resistance level, a fib level, a recent high or low. If it is, this might suggest that although the basic premise behind the trade is sound, the price may not move very far creating a poor risk/reward ratio.

Check if any news is due that might affect the market. Forex, for example, often moves significantly – and unpredictably – on the release of certain news reports so you need to take care when trading around those times.

You can also use the ‘look before you trade’ principle if you work with several indicators. A purely technical trader might want all his or her indicators to be firing at the same time before taking a trade. If you add a discretionary element to your trading you don’t have to do this. You can weigh up the importance of each indicator and even if one is not firing, take the trade if everything else looks right. Or, if one is lagging behind the others but it looks as though it might fire in the next bar or two, you might use your judgement to step in front of the signal and enter early.

You can use your discretion in any situation and apply as much or as little of it as you like. To begin, when your system signals a trade, you might use discretion simply to check the price against support and resistance levels or trendlines. As you gain experience you might take fib levels or pivot points into consideration. As a setup approaches, you might search for candlestick patterns such as dojis or chart patterns such as double tops and bottoms that might confirm the trade or suggest caution.

In essence, what you are doing is using the power of your brain – its reasoning, deductive and intuitive abilities - to adapt your trading method to changing markets. With experience, you will do this naturally, subconsciously. We allow and compensate for narrow-range days, poor volatility, erratic price movement – these and a whole range of other factors that make the market move as it does, factors that standard indicators and technical analysis can’t fully take into consideration when presenting their signals.

We can do this - purely mechanical systems can’t. Self-adapting and self-optimising systems attempt to do it but they are not consistently successful, and there is a whole raft of Artificial Intelligence, Neural Network and Genetic Algorithm software that aim to analyse markets to the Nth degree to create successful trades but none can match the mind of a trader well-tuned to the market.


Like any trading system, it’s possible to lose money with using a combined mechanical/discretionary system just as easily as you can make it. To make money, your judgement must be correct and this will only come with practise and experience. However, you can be sure that blindly following a mechanical system will not, in the long term, make you profitable.

Also remember – the entry decision is only part of the trading process - and some would say only a small part at that. However, without a method you have no trades at all so the system remains an essential part of the plan.

By combining discretion to your trading rules you will begin to develop your own trading style. Your decisions and judgement calls will be based on aspects of trading that appeal to you and that you are comfortable with. It can be a self-reinforcing process. As you make successful decisions, you become more confident about them which, in turn, makes you more comfortable with using your discretion.

If you have any questions or comments, please feel free to contact me.

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Re: Combining Mechanical and Discretionary Trading

Check this one

Oct 30, 2012

New Member (6 posts)

Re: Combining Mechanical and Discretionary Trading

Source: Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading Methods and Applications (New York Institute of Finance)

The major problem is the failure of the system to recognize when the market is not trending and its inability to turn itself off. The measure of a good system is not only its ability to make money in trending markets, but its ability to preserve capital during non-trending periods. It is this inability of the system to monitor itself that is its greatest weakness.

Another drawback is that no allowance is generally made for anticipating market reversals. Mechanical trend-following systems ride with the trend until it turns. They don’t recognize when a market has reached a long term support or resistance level, when oscillator divergences are being given. Most traders would get more defensive at that point, and begin taking some profits. The system, however, will stay with the position until well after the market has changed direction.

The mechanical system signals can be used simply as a mechanical confirmation along with other technical factors which I mentioned previously. Even if the system is not being traded mechanically, and other technical factors are being employed, the signals could be used as a disciplined way to keep the trader on the right side of the major trend.

Furthermore, mechanical system signals can also be used as an excellent screening device to alert the trader to recent trend changes. The trader can simply glance at the trend signals and instantly has several trading candidates. The same information could be found by studying all of the charts. The mechanical system just makes that task quicker, easier, and more authoritative. The ability of the computer to automate system signals and then alert the trader when signals are triggered is an enormous asset, especially when the universe of financial markets has grown so large.

Jun 26, 2011

Rookie Member (23 posts)

turtle trader
You can also design rules to tell you whether or not you should be trading a particular system, like creating a moving average of the equity curve and only trading the system when the curve is above the average.

Hello Simon,

Thanks for this, could I trouble you with a few questions?

Is this method a widely excepted technique for defining when to trade mechanical systems? Do you have any links to information about this? Or is it something you've discovered and made work for you?

All advice appreciated,

Mar 13, 2005

Legendary Member (1335 posts)