Combining Mechanical and Discretionary Trading

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Old Mar 3, 2005, 2:03pm   #1
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Combining Mechanical and Discretionary Trading

We've just published a new T2W article called "Combining Mechanical and Discretionary Trading" by Jetheat.

Quick Summary: Mechanical trading systems may be missing one crucial element - brain power.

PS. Don't forget to rate the article after you've read it and share your comments on this thread.
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Old Mar 3, 2005, 4:42pm   #2
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Joined Jan 2004
What normally happens when you apply discretion to a mechanical system is that you end up
not taking the best trades. The best trades are from obvious and often tend to come out of

The article mentions that drawdowns that are the biggest problem with mechanical systems,
a disciplined trader will not have problems taking drawdowns, if you are risking 1% of account
per trade, drawdowns in excess of 25% are very unlikely. And if you are trading multiple
markets and a combination of non correlated systems (trend/counter trend combined) these
drawdowns wont last very long.

A small trader with 10K account wanting to make say 5K a year, should be willing to take a 2.5K

If you cant handle drawdowns you shouldnt be trading.

This is not to say that living through drawdowns is easy, it isnt, but you just have to do it
if you want to be a succesfull trader.

Last edited by donaldduke; Mar 3, 2005 at 4:58pm.
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Old Mar 3, 2005, 4:46pm   #3
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Drawdowns can be managed and minimised by running a portfolio of trading systems.
Tomorrow anything may happen for no reason.
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Old Mar 3, 2005, 5:14pm   #4
Joined Mar 2004
Drawdowns are inevitable!
But would you want more drawdowns than necessary?

Is there a way to avoid drawdowns when possible? Of course there is. You need to apply logic and research to your trades.

For example, if your mechanical system gave you a long signal, but price was sitting a few pips below a major resistance level, would you take the trade at that time or would you wait a few pips before you placed the trade?

If you decide to take the trade because you are a hard core mechanical follower, than this will result in more drawdowns than necessary.

If you decide to wait a few pips, than you have just used a part of your brain to apply discretion (Mechanical Discretion to be exact).
This is what the artcle is referring to. Get all the facts before you place every trade.

How often do you find taking a trade gives you a profit of 5 pips before it turns around and hits your 20 pips stop loss? These types of trades can be avoided at times and therefore decreasing the number of losses and drawdowns.

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Old Mar 3, 2005, 5:51pm   #5
Joined Oct 2003
If the resistance level is that important one could include it in the mechanical system. If not and if the system has been build correctly it really shouldn't matter.

I don't think there is any problem about using discretion as long as it doesn't mean you end up not taking trades. One way to do it is to have a discretion window on a trade. The system says buy now, but you could give yourself a time window to do the buying. One can then performance test yourself against the system.

DonaldDuke is right about Drawdowns. The best trades are normally the ones that you really don't want to take as they just seem wrong. Sounds like the systems you've looked at Jetheat are fitted to market character so they come and go (eg hi volatility = it works, lo volatility = it doesn't).
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Old Mar 3, 2005, 5:59pm   #6
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Joined Jun 2003
discretions are probably better applied to exits, rather than entries..

missing out on good gains is psychologically tough, and you could end up with the trading equivalent of "the yips".
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Old Mar 3, 2005, 8:44pm   #7
Joined Jul 2003
I know exactly where you're coming from JH - but I do have concerns about the impact your article may have on less experienced traders.

There can be no 'real' hybrid mechanical/discretionary trading system - they are a contradiction in terms. What you are explaining as it exists within your trading approach is (presumably) born from a great deal of personal experience with your chosen market area(s).

This building of discretionary capability you allude to is another name (I believe) for Intuition. A much maligned word in trading circles, but if you consider Intuition is nothing more the Unconscious processing of information events. And that these events you are only able to process Unconsciously because of long exposure and experience to and with them within conscious awareness - it makes a lot more sense.

Like the 'Intuition' the car door hasn't shut properly. How many times have you 'heard' it shut properly? And how many times have you 'felt' just how much effort was needed to close it properly? I may be dragging the point - I hope not. You 'know' the door hasn't shut because it hasn't 'matched' one or more of the criteria which (by now) you Unconsciously process each and every time you carry out this routine event successfully.

So for those traders who have put in the hours and have moved into the realms of Unconscious awareness and trading has become a 'routine event' - fine. But my concern is that many newbie traders may well decide they already 'know' enough to circumvent a profitable system and method - to their ultimate detriment both financially, psychologically and experientially.

A large number of hours expended working with a mechanical system may well lead to Intuitive insights and discretionary capability. But these insights 'arrive' in and of themselves and are unmistakable when they do. My own belief (and it is just a belief) is that this is a natural process very much determined by the unique environmental, mental and physical characteristics of the individual. To suggest or propose the active acquisition of such skills may be worse than self-defeating.

I look forward to other members comments and experiences using your approach.

Last edited by TheBramble; Mar 3, 2005 at 8:54pm. Reason: additional thoughts....
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Old Mar 3, 2005, 9:12pm   #8
Joined Mar 2004
This is my point exactly.
What I'm trying to convey is, new-intermediate traders need to learn a bit more about how, why when etc.. before they start to apply their own discretion to a mechanical system.

Of course, applying your own discretion to a system has to be correct otherwise there is no point.

I believe discretion can be taught to new-intermediate traders and I also think it's importanat for these traders to get on the case as soon as they can otherwise blindly following many mechanical systems can be dangerous.

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