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Hi Scott
Thanks for a most interesting post. I hope
we get a good discussion going.
Let me take the other side....but first say that
I am arguing for discretionary trading
for an experienced trader. I agree that every
novice trader should start with a set of
unbreakable rules. In this way, he acquires
the experience necessary to ensure his
intuition is not in fact "into wishing".
Secondly I am assuming that discretionary
trading does in fact suit a trader's
personality - no point trying to force a
round peg into a square hole.
With those two proviso's in mind.....
----- Original Message -----
From: Scot Billington <scot.billington@xxxxxxxxxxxxx>
To: <realtraders@xxxxxxxxxxxxxxx>
Sent: Monday, January 24, 2000 5:12 PM
Subject: [RT] Systematic vs. Discretionary
I think one of the critical decisions a trader makes, and one of the true
distinctions between trading styles is systematic vs. discretionary. When I
say systematic trading, I mean mechanical trading, X closes under Z with A,
B, C in line, I sell with a stop at Y EVERY time.
I will make the argument for systematic trading and invite someone to do the
same for discretionary. This is my opinion derived from what I consider to
be a fairly solid argument. People have made money with all types of
trading, so I do not begin to suppose that what I believe is the only or
even necessarily the best way to profit. I do believe that my points are
valid and do provide the path of least resistance to successful trading. I
will also (and I encourage anyone arguing for discretionary to as well)
constrain my points to sys. vs. disc. only, not subsets of each class. I
will try to stay as objective as possible.
The major advantage that systematic trading offers is that it removes as
much human emotion as possible from the trading decision. Human nature wires
us to be losers in the markets. Problems at home, traffic, surroundings etc.
all affect our emotional disposition, which in turn usually affects our
market perceptions. It is rare to be able to make clear, consistent,
rational trading decisions under the circumstances of life. It is very
difficult to keep your 'mood', good or bad, out of your thinking process.
With a system the traders reactions to the market environment are determined
outside of market hours allowing for the maximum amount of reflection and
for the best judgment of the trader. This has not even begun to consider
how much affect our recent trading results can have on our decision making
process. Win a lot, feel good, overly aggressive. OR Win a lot, afraid of
losing it, overly conservative. Lose a lot, want it back, double
down...etc.
"RB: I believe that this idea - "that human emotions can be and
should be eliminated from trading" is no longer supported by modern
philosophical and scientific theory.
>From my experience and from recent medical evidence, emotions
can be managed but not controlled. The issue is not whether or not
we experience an emotion - fear, in particular & etc - but whether we
allow it to influence us from making or not making a decision we otherwise
would not/would have made. In fact we have no option about
experiencing the emotion - we only have an option of the extent to
it will affect us.
Framed in this way, it becomes an issue of discipline. If a
systematic trader suffers a drawdown (by that I mean losses
outside the norm), he will experience "emotions" that if
not managed, will affect his trading - the same can be said for
a discretionary trader.
In "The Growth of the Mind", Stanley L Greenspan MD has
this to say:
"Ever since the ancient Greeks, philosophers have
elevated the rational side of the mind above the emotional,
and seen the two separate. Intelligence, in this view, is
necessary to govern and restrain the base emotions....
Our developmental observations suggest, however,
that perhaps the most critical role for emotions
is to create, organize and orchestrate many of the
mind's most important functions"
Greenspan goes on to make a case for saying that
unless we allow our emotions a role in our
learning experiences, we will be unable to learn
the necessary lessons life has to teach.
This is merely one is series of books stating the
same principle from different viewpoints.
e.g. Fear itself by R Dozier Jr." RB
Second major advantage is that of consistency. Most strategies work
sometimes and don't work sometimes. One needs consistent application of a
theory over a large set in order to catch the good and the bad. A system
trader by definition will make the same decisions to the same relevant
information time after time, year after year. He/she allows creativity to
come out during research and testing, but reacts the actual trading process
like a robot. The model of consistency. The burden of consistency on a
discretionary trader is enormous. When one is discussing a trading career
that may last into the decades, one can see how hard it is to use the same
thought process again and again. Weigh the same factors again and again.
Another note is the incredible pressure placed on the trader and the wear it
might have over a lifetime, particularly if decisions are being made 'on the
fly'. You have had a solid year as a discretionary trader. Can you be sure
that you can repeat that performance again and again and again? There is
much less day to day pressure on the systematic trader.
"RB: The consistency that is important lies is the execution of a trade
be it entry or exit. If a discretionary makes a note of the intuitive
process by which he fails to take a trade (or to take one), the same
potential consistency is there for the taking.
I say potential because simply because most mechanical traders are
using computer generated systems. Right now, computers are to
hard pressed to define the congestion markets such as that
found in the GBP/USD (see attached GIF). The discretionary
has the best computer available - his mind. The mind if used
to learn continues to learn with experience so that the consistency
available improves with experience." RB
A third advantage is in testing theories and delineating between problems
with the method or mistakes by the trader. Discretionary trading can not be
back tested, and it is very difficult to judge the underlying theory, since
the individual trader plays such a large roll. The only way to judge a
discretionary method is by real time trading and even then one can not place
the cause of losses. For example let's say I am trading discretionary
method X, and I am not making money. Am I going through a normal down
period? Am I bringing too much emotion and inconsistency into my decisions?
Are my problems or triumphs at home influencing my trading? Or, does method
X not give me a market edge? How do you tell? Am I looking at the wrong
fundamental factors/market patterns, or am I nervous about my impending
wedding, or does the entire idea just not work? Systematic trading avoids
these paradoxes. Systems can be back tested and future performance,
therefore, estimated. Emotions are removed, and broken rules alert the
trader to their re-appearance. Discipline and consistency are much easier to
have and to track when one trades a system. If losses occur, one can say,
"Have the rules been followed?" If they have, you know the problem lies
within the method. If not, the problem lies with the trader.
"RB: While the testing may be different, testing is possible for the
trader's plan - not his execution.
All the tools I use have been tested for randomness on the basis of
my plan i.e. assuming that I execute the plan, has the effect on my
plan the result of random?
Whether or not I execute consistently is a different matter (discussed
above). But the systems trader has exactly the same problem. The
fact that he back tests has not changed the success ratio." RB
Last, discretionary trading attracts many weaknesses of our psyche. With
discretionary trading we might be able to sell the high, buy the low, or be
'right'. Market prediction becomes foremost. We can become too tied to
each individual trade or decision rather than seeing them in their proper
context as one of a very large set. Discretionary trading's siren song is
the possibility of all winners or to be all knowing or to have figured out
some market order to the nth degree. While these things may or may not be
possible, they are NOT necessary in order to make large trading profits.
"RB: On this we are in total disagreement - whether or not I am a
discretionary has nothing to do with the way I view the markets. This
is a function of my psyche.
I view each trade "merely one in a series of probabilities" (heard Ruth
Roosevelt say that once and loved it so much I adopted it). Each analysis
is made against the background of probability occurrence. I know
why I take a trade and what must happen for me to remain in it. If it
fails to happen - I am out even if my stop has not been triggered.
This I believe is the greatest advantage of the discretionary trader -
he is able to say when and why he will remain in a trade; he does this
under some general principles. The systematic trader needs
to just about stipulate every conceivable event that needs
to take place to duplicate the same decision. I doubt if the
exists the computer technology at present to do this.
I believe that the basis of the argument in favour of the systematic
trader lies in the mistaken belief that reason is superior to
our emotions. Once we accept the new evidence, the basis
is undercut."RB
regards
ray
R Barros
101/25 Market Street
Sydney NSW 2000
Australia
Voice: 61 2 92673470
Fax: 61 2 92673478
E-Mail: rbarros@xxxxxxxxxxxxxx
R Barros
101/25 Market Street
Sydney NSW 2000
Australia
Voice: 61 2 92673470
Fax: 61 2 92673478
E-Mail: rbarros@xxxxxxxxxxxxxx
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