Discretionary vs. Systematic Trading - Profile of your journey?

This is a discussion on Discretionary vs. Systematic Trading - Profile of your journey? within the General Trading Chat forums, part of the Reception category; I will start this off to a link of Larry Connors of tradingmarkets(.)com talking about the benefits and drawbacks of ...

View Poll Results: Discretionay vs. Systematic Trading
Discretionary, have not tried Systematic 5 13.51%
Discretionary, prefer it to Systematic 11 29.73%
Systematic, have not tried Discretionary 1 2.70%
Systematic, prefer it to Discretionary 13 35.14%
Hybrid of both systems in separate accounts 7 18.92%
Voters: 37. You may not vote on this poll

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Old Mar 27, 2006, 3:04am   #1
 
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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/rockw...ter-Part-1.htm
http://www.rockwelltrading.com/rockw...ter-Part-2.htm

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

http://www.trade2win.com/boards/poll...lts&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.
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Old Mar 27, 2006, 8:49am   #2
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Why would a consistantly profitable discretionary trader want to apply a different methodology to a trading opportunity?
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Old Mar 27, 2006, 9:20am   #3
 
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Quote:
Originally Posted by Tuffty
Why would a consistantly profitable discretionary trader want to apply a different methodology to a trading opportunity?
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?

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Old Mar 27, 2006, 11:13am   #4
 
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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.

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Old Mar 27, 2006, 11:35am   #5
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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.
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Old Mar 27, 2006, 4:00pm   #6
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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.

Quote:
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.
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.
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Old Mar 28, 2006, 6:08am   #7
 
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North_Face started this thread 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.

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Thanks! The following members like this post: Charlton
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