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Title: Re: [amibroker] Re: 'Rule Based' versus 'Discretionary' trading...
Brian,
I think the primary difference is that mechanical traders can analyse their results quantitatively. They can communicate their actions in scientific terms to others who can duplicate their success.
Descretionary traders make decisions that are based on personal knowledge and circumstances, perhaps using many factors unknown to themselves. Like which journal they read the night before. Very few descretionary traders will be able to communicate (teach) their techniques to others others in any way that garanteees comparable success. For a novice traders to try and mimic their techniques witout having similar backgrounds merits caution.
This doesn't mean I have no respect for descretionary traders, they may very well do much better than mechanical traders. This is not an issue of who is better. Its just that descretionay trading techniques are virtually impossible to define in any scientific manner.
herman
Wednesday, August 20, 2008, 7:00:04 AM, you wrote:
> Re one of your original questions, "Does one lead to the other?"
> Yes, in my experience it does.
> This year I found myself reading the headline news at the finance
> page, and experimenting with systems based around 'event' trading,
> when two years ago I said I would never do that.
> Fortunately for me I readily concede to the first signs of spring and
> because of my interest in the Psychological aspects of trading I can
> come to terms with my actions quite easily.
> IMO the terms (DT and MT) are quite arbitrary and merely a matter of
> semantics - no such creatures exist!
> It is quite incorrect to assume that TraderA is a discretionary
> trader and therefore 'intuitive, creative, visionary, has superior
> insight, knows what the market will do, is passionate' etc AND that
> TraderB is 'logical, objective, a superior thinker, is limited to
> mechanicality, is cool and calculating, relies on computers to
> analyse market behaviour' etc.
> Those who are successfully competing in the the 'race for trading
> gold' have both faculties going for them in well above average
> quantities.
> Similarly it is incorrect to assume that Chart Traders are all DT's -
> they can just as easily be using rules/logic etc via their charts as
> via a BT or anywhere else e.g. formulas linked to studies that are
> placed on the chart.
> In fact I was speculating, privately, the other day as to how a
> person of my typology ( a confessed 'upside down man') could be
> relatively comfortable in the virtual company of
> programmers/mathematicians etc and I came to the following conclusion:
> a) the abstract mind is the bridge to the sub-conscious mind
> (individually and collectively)
> b) the superconscious mind resides in the sub-concious, beneath the
> dark elements (shadow) of the sub-conscious ("don't pay the Ferryman
> til you get to the other side")
> c) I am interacting with the sub-conscious via the abstract mind and
> using the language of symbology
> c) mathematicians and programmers are adept with their abstract
> minds - mathematics and programming are abstract languages so at that
> level we are peers althouh we are traversing different paths
> (parallel paths never cross but we can look over and chat to each
> other across the divide).
> Bilbo - thanks for the post - I am waiting for Purebytes to read your
> attachment.
> Tomasz - I thought your posts in this thread were statesmanlike -
> thankyou (it is a threadlike tightrope we walk but exhilirating when
> we can stay on it).
> A couple of colourful vignettes I left out of my first post:
> (1) two years from now a trader backtesting data will come across a
> handful of volatile trades in Fanny, Freddy and friends.
> All they will see is the numbers.
> They won't see the context - political connections, Fed intervention,
> national interest, lots of red on the books etc unless they really go
> out of their way (not many do that, from the backtesting environment).
> Will that make any difference to their trading?
> Are they better or worse off, if they possess the contextual
> information as well as the numerical?
> (2) if the stockmarket Gods appeared at the foot of your bed one
> morning and announced that "It has been decreed that henceforth no
> investor trader will be allowed to own more than one trading software
> package AND no software package can contain both charting and
> backtesting/optimisation features - they can only have one or the
> other".
> (when you go to your broker platform you don't see any charts - only
> the bid and ask so all trading decisions need to be made in your
> software package first)
> Which one would you choose?
> Are you are Discretionary Trader OR a Mechanical Trader?
> brian_z
> --- In amibroker@xxxxxxxxxxxxxxx, "sidhartha70" <sidhartha70@xxx>
> wrote:
>> Bill,
>> Not holding back. Was just waiting for the 'chart features' side of
>> this discussion to come to a conclusion.
>> Well, as I stated in my original post, my intention was to learn
> from
>> others experiences. For the record, these are mine...
>> I was trading large portfolio's for various investment banks.
>> Essentially european equity long short portfolios based around
> various
>> statistical arbitrage ideas. Ironically the journey into trading my
>> own money has, of course I suppose, made me a much better trader. I
>> was doing monthly walk forward optimizations back in the late 90's
> and
>> onwards. My experience of purley 'mechanical trading' (to use the
>> correct term as the other Bill pointed out) was that I could
>> consistently achieve 30% net returns in rigorous out of sample
>> backtesting. However, whenever I came to trade these
> ideas/portfolios
>> live my return was basically halved, volatility of returns always
>> slightly higher than in backtest. Now, not wanting to take the
>> discussion in the direction of 'why' that happened (all this stuff
> is
>> well documented by others), I wanted to take the discussion into the
>> form of 'what did I learn from where I was at as a trader at that
>> point, with the benefit of hindsight'...
>> And I think what I learned was this... I often used 'mechanical
>> trading' and the 'hunt for a system' as a kind of security blanket,
> or
>> excuse you might say, for not becoming 'a better trader'. The
>> psychological appeal of 'mechanical trading' is obvious. Becoming a
>> 'better trader' is clearly a very general term and what I mean by it
>> are the following... 1. knowing myself better as a trader, my
>> weaknesses, strengths, emotional biases in decision making, Mark
>> Douglas et al etc..etc.. 2. Understanding what happens 'under the
>> hood' of the market place. Understanding the auction process in
>> intimate detail, and how price is a conduit to seek value, and how
>> market structure develops out of that process. 3. Through genuine
>> experience learning to understand the context of the information I
>> recieved from the marketplace. Any knowledge I had, any 'rules' I
> had
>> formulated should always be valued by the conext surrounding them.
>> Something I think that can only come from experience I believe.
>> I guess we are talking about a type of 'fuzzy logic' here Bill. That
>> 'fuzzy logic' could be seen as a weakness, but it's my view that for
>> the best discretionary traders, it is exactly this ability to use
>> fuzzy logic that is one of their great strengths.
>> Maybe my experience of 'mechanical trading' was quite specific...
> when
>> you trading such large portfolios it really is impossible to use
> that
>> process as a means to 'get under the hood' of the market - you get
>> information overload basically from so many trades. If you are
> trading
>> one or two instruments I can see that there is perhaps an associated
>> learning process from that focus.
>> There seem to be some really excellent 'mechanical traders' on this
>> forum, but I also get a sense that there are quite a few smart guys,
>> perhaps with not much market knowledge, with strong engineering or
>> software backgrounds, who are spending vast human resources in the
>> attempt to 'find a system' when they really should be trying to
>> understand the market at a much deeper level. Of course, all the
> best
>> 'systems' are born out of market knowledge...
>> Just my 2c worth...
>> --- In amibroker@xxxxxxxxxxxxxxx, "brian_z111" <brian_z111@> wrote:
>> >
>> > Sidhartha,
>> >
>> > Perhaps we can learn a bit more if we do some dissection:
>> >
>> > > Over recent years I have migrated away from rule based trading
> back
>> > >to
>> > > discretionary, and find myself developing some quite strong
> opinions
>> > > about rule based trading
>> >
>> > So far you haven't posted any strong arguments against 'rule
> based
>> > trading' .... are you holding back?
>> >
>> >
>> > More importantly.....
>> >
>> > my mini dictionary defines discretionary as "freedom to decide
>> > something" but so far not one discretionary trader has given us a
>> > PRECISE example of a trading decision that they make freely .....
>> > free of what? ... if you are using an indicator, as a visual cue,
> and
>> > making a decision based on that visual input, is that a 'freedom
> of
>> > choice' decision OR did you just use the human computer (brain)
> to
>> > run a few lines of 'code'...... perhaps a level of consciousness
> that
>> > is present in the subconcsious mind (that is to say that most of
> us
>> > are not consciously aware of OR can interact with) can manage
> fuzzy
>> > logic, or similar, with ease ... dare I say even super-
> rationality?
>> >
>> > ~(left side - right side)~
>> >
>> > Mark Douglas claims to experience a "transcendental state of
>> > consciousness where he is at one with the market and KNOWS what
> it is
>> > going to do" (my paraphrasing) ...... if any one in the forum can
> do
>> > that then I might consider that to be the ultimate in
> discretionary
>> > trading (no point in explaining it in too much detail if no one
> is
>> > actually doing it).
>> >
>> > brian_z
>> >
>> >
>> >
>> > --- In amibroker@xxxxxxxxxxxxxxx, "sidhartha70" <sidhartha70@>
>> > wrote:
>> > >
>> > > Thought I'd try and start a discussion on this very important
>> > topic...
>> > >
>> > > Over the years I seem to have come full circle... back in 1994
>> > > starting as a largely discretionary trader, I moved into 'rule
>> > based'
>> > > systems while working for Merrill Lynch back in 1997. I spent
> about
>> > 7
>> > > years trading various types of rule based system. All
> variations on
>> > > statistical arbitrage themes.
>> > >
>> > > Over recent years I have migrated away from rule based trading
> back
>> > to
>> > > discretionary, and find myself developing some quite strong
> opinions
>> > > about rule based trading (opinions which I happy to have
>> > changed!!!).
>> > >
>> > > One thing that strikes me about this forum is the focus on 'rule
>> > > based' trading and backtesting/optimization of systems. Perhaps
> this
>> > > relates to the grounding of the product. I have been an owner of
>> > > AmiBroker for about 5 months now I guess... and it seems to me
> it's
>> > > strengths lie in backtesting & optimization (if only I had a
> product
>> > > like this back in 1997 my life would have been an absolute joy).
>> > > However, it's weaknesses seem to lie in it's charting (as has
> been
>> > > commented on a couple of reviews on Elite Trader) and
> particualrly
>> > the
>> > > openness & adaptability of it's charting framework.
>> > >
>> > > Anyway, I'd love to start an open discussion on 'rule based'
> versus
>> > > 'discretionary'... Pros, cons, differences, potential returns
> from
>> > > each route, does one route lead to the other etc..etc...
>> > >
>> > > I'm very much wanting to learn from opening this subject up.
>> > >
>> >
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