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Great topic, Scot!
I've only been in this game for a few years. I'm still a novice and I still have lots to learn. But I am profitable in my trading, even though I can't read the market worth beans. That's because I *can* program pretty well, and I've developed mechanized models that consistently make profitable calls over the long term. A lot of the system's trades are "stupid," from a chart-reading perspective, and I'm sure they'd give a good discretionary trader the heebie-jeebies. But over the long haul the system is very profitable, stupid calls or not. As long as I exercise the discipline that ANY trader needs to apply, I do quite well.
(By the way, I consider a systematic trader who creates and understands his own models to be a very different animal than the black-box trader. You have to be brave and trusting to follow a model you don't understand, and you're helpless if the model starts to go haywire. I think the "self-made system trader" has a huge advantage.)
I envy the people who can "read the tape" and get a feel for where the market is going. I would love to be able to confidently project where the market is going, and how far. I'm still learning and one day I will develop that skill. But for now I rely on "mechanical aids."
Either way can get the job done. A skilled musician can sit down at a piano, or pick up an instrument, and make beautiful music. It takes years of constant practice to accomplish that but it's a marvelous skill. I can't do that -- but I can create wonderful music. I just do it with my stereo and a CD. Does that mean I'm less of a "musician"? Absolutely. But I still create the music. I'm just a "DJ" instead of a "lounge singer." :-) And when the "music" is bottom-line profits in my trading account, I frankly don't care whether I created it with "art" or with "science." Either way spends just as well.
Even when I develop the skills to read the market better, I don't know if I will switch away from mechanical trading. I'm an analytic person, and I like the ability to test and verify a trading approach. I've tried to trade discretionary approaches that "seemed" to work, but fell apart in actual use. I agree with you that it would be difficult to backtest most discretionary approaches. Even if you go through the laborious hand-work of generating historic trade decisions, how can you be sure you're doing it accurately? How can you know what the market "feel" was at the time, and how that would have influenced your decisions? How can you be certain that the pressure of real-time decision making, of struggling with your confidence in your ability to read the market, of actually pulling the trigger with real dollars, wouldn't have affected your choices? I mean the discretionary trade decision process, not the execution itself. It seems to me that "discretionary backtesting" would be even less accurate than real-time paper trading, and we all know that can be misleading.
Heck, for that matter, even systematic backtesting is a form of paper trading. The "view from 50,000 feet" that you get in a system report sterilizes a lot of the in-the-trenches stresses and pains of actual trading, and if you don't have iron discipline you might not have followed it faithfully. I know I've been guilty of that. But that's a matter of execution and discipline. Discretionary traders have that problem **IN ADDITION TO** the problem of real-time issues actually influencing their trading DECISIONS.
That problem aside, a mechanical system can be 100% verified in every detail, at least as far as the system goes. The *execution* of the system depends on you and your discipline, but the system itself can be verified. And in fact those "stupid" market calls can sometimes even be an advantage. When you make your trading decisions based on commonly-known chart patterns &etc, you can assume a lot of other people are doing the same thing. Nobody has a system exactly like mine, so it's less likely for me to run into a lot of competition.
Bob Heisler wrote: > Whether you can trade successfully or not depends upon your > resolve/ability to conquer/control the fears associated with > trading, and be able to think clearly and manage your position > WHILE IN THE MARKET. Of equal importance is the ability to trade > WITHOUT a BIAS or OPINION as to market direction (NO EGO), and > realize that there is no such thing as overbought/oversold, and no > price is too high to buy or too low to sell.
Absolutely true. But I must point out that EACH AND EVERY ONE of those points applies 100% to systematic traders as well. They might be applied a bit differently, but the effect is the same. When you follow your system signals, you must still conquer your fears. You must have NO OPINION of the market, because you must follow your system, no matter how "stupid" the call seems. You must remember that your system generated its profitable history making "stupid" calls like that, so you should trust it if it seems to be buying "too high" or selling "too low." Maybe it will be right this time, or maybe not. But over the long run it will come out ahead.
Mechanical and discretionary are two very different approaches, and they require very different skills. But they have a LOT in common. Fundamentally both flavors of traders are STILL TRADERS, and struggle with many of the same challenges on a day-to-day basis. They just generate their trading decisions differently. You can succeed with either one, assuming it matches your personality, if you develop the requisite skills and discipline. I don't think either one is "better" or "worse." They're just different.
Gary
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