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At 11:35 PM -0400 7/25/99, The Omega Man wrote:
>Bob, I think you're missing it... The idea here is to inform newer
>traders of the way the game's really played. The game is not "build a
>system and trade it mechanically". You and I agree that that is
>impossible. The game is "build some tools to help yourself then use
>your market experience to help you trade". Don't we agree that that
>is really the way the game is played?
>
>And if we agree on this, what should our advice be to newer traders?
>If every method is truly discretionary at root, then what should
>newer traders be working to develop?
There is this impression that the world is black and white - that you
must either be a discretionary trader who stares at indicators and
decides what to do, or you must be a system trader who blindly lets
your computer trade your account mechanically, presumably while you
are enjoying yourself on the golf course.
In fact, there are all shades of gray.
> At one extreme, there is the total discretionary trader who
watches the screen all day and make trades.
> You can also set up indicators with alerts to "wake you up" when
the market seems to be getting close to a point where you might want
to make a discretionary trade. This can eliminate the need to watch
the screen all the time and lets you read a book while you wait.
> You can also design a system to tell you when you want to get
into and out of a trade, but then when you get the signal, you can
watch the market for a few seconds or minutes and pick a good entry
point. If you want to go long and the market is in a short-term down
trend, you can often make a few extra bucks by waiting a few moments
until it starts to turn and use a market order. These fills are often
better than using limit or stop orders. Or, if the market is already
moving up rapidly, you might decide to pass on this one since you
would probably get a lousy fill anyway. Backtesting assumes you get
filled. In fast markets, you probably will not be.
> You can have a "pretty good" simple trading system that does
fine under "normal" conditions. When you get a signal, you can look
at the indicators and see if things look normal. If so, go with the
trade. Of course, you miss some good ones this way but eventually you
begin to learn which market conditions are good for your system and
which ones are bad. As you begin to learn this you can then go back
and add code to help make the decision more mechanically. Most things
in life are improved by "successive refinement".
> Handling bad data is a similar situation. Some systems are more
sensitive to bad ticks than others so, at a minimum, you need to look
at the price chart to see if your system was triggered by a bad tick,
far away from current prices. This can be trickier than it sounds.
Most systems use some smoothing so the effects of bad data can last
quite a while.
> At the other extreme is the totally automatic system that can
handle all market conditions, all kinds of bad data, and has no bugs
in the code. Programming such a system would probably be beyond the
capabilities of most TradeStation users. It would probably require
many pages of code whereas a 90% to 95% solution might require only a
few lines of code.
Many people count on stops to get them out of bad situations that
their system code cannot handle. But even this can also be tricky.
For example, consider the following simple system:
Ave1 = SomeAverage(Close, Len1);
Ave2 = SomeAverage(Close, Len2);
if Ave1 > Ave2 then Buy;
if Ave1 < Ave2 then Sell;
You find this works sometimes but not in all cases. So you decide to
use the Money Management stop in TradeStation to get you out of bad
trades. But notice that once you are out, the conditions for entry
are still true so TradeStation gets you right back in.
But you do not understand this so you do an optimization run on the
limit of the Money Management stop and select the best value. With
this value you can easily enter and be stopped out many times on what
was supposed to be a single trade. In this simple case, what is
happening might be obvious but in a complex system, you might not
understand what is happening. So your system is telling you to get in
and you can easily see that this would be stupid. But as a good
system trader, you take every trade until you go broke.
I hate to see people being told that they must either be a
discretionary trader or design a system that they can blindly trade
mechanically, no matter what happens. There are a lots of "pretty
good" systems that are somewhere in between, and designing these (or
"improving" a system they buy) is well within the capabilities of
most people.
Bob Fulks
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