Discretionary vs. Systematic Trading - Profile of your journey?

I will start this off to a link of Larry Connors of tradingmarkets(.)com talking about the benefits and drawbacks of these two types of trading strategies.

http://www.rockwelltrading.com/rock...cretionary-Trading-Which-Is-Better-Part-1.htm
http://www.rockwelltrading.com/rock...cretionary-Trading-Which-Is-Better-Part-2.htm

This post goes along with a poll that is on the T2W homepage.

http://www.trade2win.com/boards/poll.php?do=showresults&pollid=234

74 respondents - with 43 Systematic (Mechanical) and 31 Discretionary.

I am curious of the evolution of the traders who are members here at T2W. How many of you of you are:

1)Discretionary Traders who have never tried Systematic Trading.
2)Discretionary Traders who have tried systematic trading, but prefer discretionary.
3)Systematic Traders who have never tried Discretionary.
4)Systematic Traders who prefer it to Discretionary.
5)Hybrid of both systems using different accounts.

Personally, I am a discretionary trader who has never tried Systematic trading. I have been trading for 10 years (EOD) and am consistently profitable, but I have recently begun to look into developing a separate account for Systematic trading.

With Discretionary trading, my signal/edge trades during specific market conditions. I may trade hard for 3 months or so, but then not trade at all for the next month(s) until the conditions that need to be met for my trading come back into play.

The reason I have begun thinking of systematic trading is that I believe that it would be possible to develope a system which would have me trading during those times when market conditions do not warrant successful discretionary trading as per my signal/edge.

I have specific goals that I would like to reach and those goals could well be aided by implementing a hybrid approach by developing my own system of trading more with one system vs. the other when the market conditions warrant each individual strategy.

Of course systematic trading is nothing to be taken lightly and I know that I would have a good deal of work ahead of me in the development of the trading plan, backtesting and scaling into 'real' trading.

I am just curious what experience and advice is out there to be offered up on this subject.

Thanks in advance.
North_Face.

Why would a consistantly profitable discretionary trader want to apply a different methodology to a trading opportunity?

Tuffty said:

Why would a consistantly profitable discretionary trader want to apply a different methodology to a trading opportunity?

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I may not have stated my thoughts clearly enough ... I did not say that I wanted to apply a different methodology to a trading opportunity that I am already consistently profitable with. I stated in my previous post that due to market conditions I may have a number of months where I am trading actively and then due to changes in those conditions my activity slows considerably or even comes to a halt depending on the opportunities for the signal/edge that I trade.

An analogy may help. If I were a baseball player that hit .400 against right handers, but only .200 against lefthanders, my coach would sit me on the bench when we were going up against a left handed pitcher. If I wanted to play every game then I would need to vastly improve my performance when the lefties are on the mound. If I were able to hit at least .300 against the lefties then it would be worth it for the coach to play me every game. As it stands, if we want to win (which is the point of it all), then it is in the best interest of the team that I either improve my hitting against the lefties enough to justify playing every day or I just continue to sit it out.

Clear as mud?

North_Face

Systematic trading takes much of the emotions out of trading. You simply take the signals. As a discretionary trader you risk to be involved by emotions in taking your decisions and you are subject to noise created by the news.

URL removed by Rossored

In my opinion there is little difference. If your discretionary trading is not systematic in nature you will fail. All systems do is show the rules that you would intend to use anyway as a discetionary but remove any emotion and doubt that you may have about taking a signal.

North Face

In my experience the difference between systematic v. discretionary trading is where the disicion making process is and how it's applied. The end result over x nos of trades is just as much discretion in the trades but it's how the discretion is applied that is different. Whether discretionary or systematic trading is appropriate I think generaly depends on the person. A rule breaker would prefer discretionary trading as would someone who thrives on 'noise' and uncertainty. Whereas a planner/reflective person may prefer systematic trading.

All systems do is show the rules that you would intend to use anyway as a discetionary but remove any emotion and doubt that you may have about taking a signal.

Click to expand...

What tends to happen is that the emotional uncertainty will be re-focused on the system as a whole if trading is not going well rather than individual trades. A discretionary person may start to question themselves if things aren't going well i.e. have I lost it, etc.

What I'm saying is that the difference is not like playing left or right handers at baseball but more like the difference between playing baseball and golf, hence my original question.

Of course I could be seeing things too black and white. That's just where my experience has lead me so far.....contrary thoughts and experiences always welcomed.

Thank you all for the responses thus far.

Tuffty - 2 thoughts on your post.

1) I was thinking about this today at work. Many times it helps me to get through things sorted out in my head by putting my thoughts down on paper. I realized that I have optimized my trade to such a degree that the number of trades that I take is less than I would like it to be. I have gotten my trade to where it is by refining my set-up over the years to a point where my losses are as small as possible and I see movement in the correct direction soon after entering the trade.

Justin Mamis discusses Price risk vs. Information risk in his book, "The Nature of Risk" I have read the book a number of times and determined the optimized trade for me. The more information that you require before entering a trade, the further you are from the proper stop point. Enter too early and you find your self being stopped out earlier and more often. That point is different for everyone, but for me I have found the point where my trading results are consistent and my own nature of risk is satisfied by the entry point and the amount of information risk that I have to give up in order to get it.

Jim Rogers talks about waiting for the money to be lying in the corner and then just goint and picking it up. Mark Weinstein talked about the Cheetah and how he will wait in the bushes for days in order to pick just the right gazelle that will put up the least amount of fight.

My trade has consistently yeilded profitable trades in the 60-65% range and avg. win/avg. loss in the range of 3-1 to 3.5-1. In order to get these results I have narrowed my signal so much that I do not get as many trades as I would like as well as stopping trading when overall market conditions do not warrant action.

The solution would be to loosen my trade parameters which would also likely mean that my win rate and avg win/avg loss would decline. Because I know the type of trader that I am and my comfort level with risk I think that I would have to develop a systematic approach to take trades with lower probabilites as it would not be in my trading nature to take them discretionarily. I hope that made sense.

#2) You mentioned a few personality characteristics in your post. Rule-Breaker, planner and reflective.

I dont know if that was just a random comment or whether you have read/done research on personality types and how they react to trading, but if you have some information on that ... please share some sources.

About 6 months ago at work, I took some training that revolved around the book, "Now, Discover Your Strengths", by Buckingham and Clifton. Basically, you take a 200 question test online and each question is timed with a maximum time of 20 seconds to read the question and chose one of two responses for each question. At the end, you are given your top 5 strengths in order, out of 34. I thought it was a nice exercise and was moderately surprised at the results. #'s 2 - 4 did not surprise me, but my top strength actually did.

They were (in order): Focus, Analytical, Responsibility, Intellection, Learner. I was not surprised that Empathy, Harmony, Inclusiveness etc... were not included, as I do much better working alone.

The point of all this is that your post made me remember the book and I plan to go back through and see how/if knowing these strengths may help me with my current thoughts on possibly changing up my trading a bit.

Another book, "Trading, Sex and Dying" talks about 13 personality types, but I did not get much out of that one.

Anyways, thanks for the thought provoking discussion.

North_Face

Risk, control, personality and trading

North_Face said:

Thank you all for the responses thus far.

Tuffty - 2 thoughts on your post.

1) I was thinking about this today at work. Many times it helps me to get through things sorted out in my head by putting my thoughts down on paper. I realized that I have optimized my trade to such a degree that the number of trades that I take is less than I would like it to be. I have gotten my trade to where it is by refining my set-up over the years to a point where my losses are as small as possible and I see movement in the correct direction soon after entering the trade.

Justin Mamis discusses Price risk vs. Information risk in his book, "The Nature of Risk" I have read the book a number of times and determined the optimized trade for me. The more information that you require before entering a trade, the further you are from the proper stop point. Enter too early and you find your self being stopped out earlier and more often. That point is different for everyone, but for me I have found the point where my trading results are consistent and my own nature of risk is satisfied by the entry point and the amount of information risk that I have to give up in order to get it.

Jim Rogers talks about waiting for the money to be lying in the corner and then just goint and picking it up. Mark Weinstein talked about the Cheetah and how he will wait in the bushes for days in order to pick just the right gazelle that will put up the least amount of fight.

My trade has consistently yeilded profitable trades in the 60-65% range and avg. win/avg. loss in the range of 3-1 to 3.5-1. In order to get these results I have narrowed my signal so much that I do not get as many trades as I would like as well as stopping trading when overall market conditions do not warrant action.

The solution would be to loosen my trade parameters which would also likely mean that my win rate and avg win/avg loss would decline. Because I know the type of trader that I am and my comfort level with risk I think that I would have to develop a systematic approach to take trades with lower probabilites as it would not be in my trading nature to take them discretionarily. I hope that made sense.

Click to expand...

North Face
I've mentioned this on a couple of threads recently, but I think this is a pretty good article. In Traders magazine April Detlef Wormstall talked about "Takingg Control with Money Management" and made precisely this point i.e. over-optimisation results in the reduction of risk, but equally the reduction of time in the market, open trades and the number of profit-taking opportunities. So there is a fine balance between risk-reduction and potential profit generation. Traditionally we are told to stay out of the market unless the conditions are right.

It goes on to look at what factors we can control and what we cannot control.

North_Face said:

#2) You mentioned a few personality characteristics in your post. Rule-Breaker, planner and reflective.

I dont know if that was just a random comment or whether you have read/done research on personality types and how they react to trading, but if you have some information on that ... please share some sources.

About 6 months ago at work, I took some training that revolved around the book, "Now, Discover Your Strengths", by Buckingham and Clifton. Basically, you take a 200 question test online and each question is timed with a maximum time of 20 seconds to read the question and chose one of two responses for each question. At the end, you are given your top 5 strengths in order, out of 34. I thought it was a nice exercise and was moderately surprised at the results. #'s 2 - 4 did not surprise me, but my top strength actually did.

They were (in order): Focus, Analytical, Responsibility, Intellection, Learner. I was not surprised that Empathy, Harmony, Inclusiveness etc... were not included, as I do much better working alone.

The point of all this is that your post made me remember the book and I plan to go back through and see how/if knowing these strengths may help me with my current thoughts on possibly changing up my trading a bit.

Another book, "Trading, Sex and Dying" talks about 13 personality types, but I did not get much out of that one.

Anyways, thanks for the thought provoking discussion.

North_Face

Click to expand...

Again this is an interesting parallel to another current thread about whether the personality of good trader is introvert or extrovert.

Charlton

North Face,
The discretionary system you use has a profit factor of 5.4. In my book that is high but it depends on how many trades a year you're getting from that. As Carlton mentions above the profit factor could be reduced to get more trades and increase profits from the system. This won't necessarily increase risk but may shift where the risks are (eg execution risk will increase with more trades, ie slippage, missing an exit due to power outage etc)

Regarding personality types my comments were based on observation/experience. Charlton mentioned control. I guess discretionary traders may like being in control. They may view systematic traders as having to give control up when running their system as all the control elements have been pre-defined and the plan is just to take entries/exits according to rules. (Of course some discretion can be built into system trades eg a small window around an entry/exit)

Charlton - Thanks for the comments ... do you happen to have a link to the article you mentioned? I saw that thread title for introvert/extrovert a few days ago, I will have to give it a look.

Tuffty - I gather that the profit factor calculation you mentioned is ((%winners / % losers) (X) (Avg Gain / Avg Loss))?? ... as that is the only way I can come up with a number close to the 5.4 that you mentioned?

NF

NF, Yep, the profit factor is the total win % of all trades/total loss % of all the trades. That and to a small degree the standard deviation of them, and the nos of trades in a time period determines how often new equitiy highs are hit and what the max draw down is likely to be. My guess is that with a PF of 5.4 you won't have that many trades per year. If you did, you'd be very very profitable and I'd want to know what you're up to so I could replicate your success!!

Traders Magazine

North_Face said:

Charlton - Thanks for the comments ... do you happen to have a link to the article you mentioned? I saw that thread title for introvert/extrovert a few days ago, I will have to give it a look.

Tuffty - I gather that the profit factor calculation you mentioned is ((%winners / % losers) (X) (Avg Gain / Avg Loss))?? ... as that is the only way I can come up with a number close to the 5.4 that you mentioned?

NF

Click to expand...

NF
I can give you a link to the magazine's site, but this is a paper magazine rather than electronic.

http://www.traders-mag.com/

Charlton

Charlton -

Thanks for the link. I tried for the 3 month free trial, but that is only available in Europe. I will be going to Barnes & Noble this weekend, I will see if it is there.

Tuffty -

I should not have even brought any profitability numbers into this as it has gotten away from the originial idea of the thread, but you have me curious with the profitability factor calculation since I enjoy getting into Excel and analyzing my performance.

I am not trying to be a pain in the ars here, but you said that I was correct in my assumption as to the calculation of the profitability factor and then you quoted a different calculation than what I had said.

I gather that the profit factor calculation you mentioned is ((%winners / % losers) (X) (Avg Gain / Avg Loss))?? ... as that is the only way I can come up with a number close to the 5.4 that you mentioned?

Click to expand...

... then you ...

NF, Yep, the profit factor is the total win % of all trades/total loss % of all the trades. That and to a small degree the standard deviation of them

Click to expand...

Could you paste the formula here for me?

As for my trade, it is really a basic set-up. The first higher bar within a pullback after the B/O from a longer constructive pattern. Where I have optimized it is that I am very strict as to the price/volume action of the B/O and retrace as well as how large the B/O is and how far the retracement should pullback. I require it all to be ideal based on what I have observed from years of trading it.

Back to the original reason for the thread, I have realized that in my quest for finding the best trade for me regarding what I need all the information to tell me as it continually prints on the hard right edge is that I have found what is right for me, but that it is too rigid to create as many opportunities as I would prefer to see stronger results for net profits in the longer term.

I have started printing historical charts of trades that I did not take for a number of reasons. I will classify them based on the characteristics which kept me from taking the trade and I will see if I can find a second or third variation of it.

NF

Sorry NF, I seem to be confusing the PF formula. Both formulas work, its just a different way of calculating it depending on what figures are available. They should both come out the same.

or, to make things simple..

Profit Factor is

Total Wins
---------------
Total Losses

FetteredChinos said:

or, to make things simple..

Profit Factor is

Total Wins
---------------
Total Losses

Click to expand...

Actually no, that does not really tell you much of anything. 6 wins out of 10 trades may sound good as a 60% win rate, but you could easily be on the road to blowing out your account if you have small gains and large losses.

There are two ways to use all these performance calculations. The rookie or the losing trader may only use the WIN% as a way to feel good about themselves and justification to keep trading. What gain in a trade they may have may be falling back to the entry price and they would want to close the trade quickly with a gain of just a few dollars just so they could notch it up as a win ... a successful trade. The analysis is not to be used to feel good or bad about yourself or your system, it is to honestly evaluate your performance.

The person that wants to honestly evaluate their performance to see what they are doing right and what they are doing wrong will combine AVG.WIN / AVG. LOSS in order to quantify the WIN% with the AVG.WIN / AVG. LOSS to come up with something meaningful.

If they are taking small profits just to have 'winning' trades, then it will be apparent at that time. A winning trade is not necessarily always a winning trade, just as a losing trade is not necessarily always a losing trade. If a trade went down through your 'mental stop-loss', but you did not take it and then the trade came back to where you were profitable enough just to pay for commisions you could actually call this a winning trade. I would call it lucky and a detriment to your system overall with the trader having much more work to do on themself.

This is why Tuffty peaked my curiosity when he talked about a profit factor different than the one that I use.

Using the example of: A 60% win rate and a 3:1 avg. profit / avg. loss. I would use (.6) X 3 = 1.8 profit factor. It seems that Tuffty used 1.5 rather than .6 in his factor. Tuffty came up with a number of 5.4 with the calculation that he was using (with slightly different initial numbers to pop into the formula).

That is why I assumed that he used the wins over the losses for a factor of 1.5 where as my factor was .6. That is the difference in using #wins / # losses, rather than #wins / total trades.
6/4 = 1.5 whereas 6/10 = .6.

I get the feeling that Tuffty is either blowing me off or did not want to take the time to put the formula here. This conclusion is based off of reading Tufftys posts on another thread about Excel calculations and seeing that he was proficient enough in that area not to have made the mistake of merely using a different 'factors' in the calculations.

I would still like to read his thoughts on using the factors of the equation in different ways and what sorts of different analysis can be gleaned from that, especially with the addition of the S.D., but if he prefers not to take the time to continue with the conversation then I wont lose any sleep over it.

Just keeping it real ...

NF.

NF:

I calculate the profit factor as the total money or % got from winning trades (normally before any money managment ie keep trade sizing constant) divided by the total of money or % lost from loosing trades. Based on the figures above of 40% win rate with a 3:1 ave profit to loss gives: Total winners if 100 trades = 60 x say$3 = $180 divided by nos of loosers of 40 x $1 =$40. $180/$40= a profit factor of 4.5

Cheers, Tuffty