discretionary vs mechanical trading systems

[oilman5]

- Define a goal for yourself, and stick to it.
- Your trading focus, based on your goals and your trading preference - intraday, swing or long term positional
- Risk and Money Management
.....................................................

You may have a goal clearly in mind, but it must have three important characteristics:
1) Your goal must be realistic.
2) Your goal must be attainable.
3) Your goal must be measurable.If you want to be a successful trader, the first thing that you need to do is to set your trading goals.
...........an important message even in Larry Levins "Secrets of Emotion Free Trading", which has been a good reference for me.

Just as important as setting specific goals, you must visualize yourself successfully reaching those goals each and everyday. If you can’t see yourself in your mind’s eye as a success, there is no chance you will become successful. It just won’t happen!”

Not only must you have a goal and a plan to execute on the goals for trading, you need to think of your successful future and imagine how it is! Envision it.
Break that goal into achievable milestones, like that in a project plan, like building a house. You need land, you need money, you need an architect to design it for you, you need to have the resources and time to manage and monitor its progress.
For example, you may say to yourself, that you want to see Rs 2500 credited into your bank at the end of each week as a goal for the very short term and this is what you will do:

- I will paper trade my trading method for a week or a month and see whether it delivers Rs 2500 per week?
- Then I will do real trades for a week and evaluate the results.
- Did I achieve Rs 2500 at the end of the week? If not, why?
- Analyse, paper trade, real trades, evaluate...and repeat this cycle till your goals are met and then set a new goal with a whole new thinking behind to take the progress to the next level.

Its important that you are always in control!!! In control of what? You cant control the market............There is one control you have. You can decide when to enter and when to exit. Thats the maximum you can do.control yourself!!
So you can only TIME your entries and exits and the amount of money that you play with.. You would do things in your best interest by timing your actions like :

- Not risking more than 2% of capital as loss in any given trade.
- Exiting profitable trades, once a target profit is made. And not running after the profits.
- Always working with stop losses so that you dont lose large amounts.
REMEMBER -“A person with good self-discipline but a poor trading method will outperform a person with poor self-discipline but the best trading method currently available.”

We all want those huge winning trades. But one thing we must all remember is we can’t control what the market will do, so we must be prepared for whatever it does do. Thus, if we have a good winning run of 60 points when our objective was 75, we must gracefully exit before these profits evaporate even if that means missing out on a big winner. Thats the discipline that we need!

 

[jamit_05]

@Augubhai

(I am doing this purely to earn an insight or two out of this conversation.)

Lets take a common pattern like a 15 min pivot, which has several variation depending on shapes, sizes, ATR, occurrence in a trend, momentum and selective cases of breakout failures.

Its nothing exotic yet I'd say that it would take considerable amount of programming skill to code it. The programmer must know this pattern to come up with a code. A rare combination i'd say.

It is important to get the code right, because after a few dull days and drawdown the entire responsibility would fall on the code to spot the pattern and take a position to end the week in profit.

To this, one may argue that this pattern entry cannot be coded as it is not a method, in a stricter sense, at all. However, there are several profitable combinations of emas, indicators and other formula which can make a good trade-able system.

For that, I can confidently say that such a system would have a subdued performance as there is nothing special about it. This system would just be a huge load of number crunching, which almost anybody has access to. In fact, whatever little profit that it may earn would only be because of the traders resolve.

 

[augubhai]

@Augubhai

(I am doing this purely to earn an insight or two out of this conversation.)

Lets take a common pattern like a 15 min pivot, which has several variation depending on shapes, sizes, ATR, occurrence in a trend, momentum and selective cases of breakout failures.

Its nothing exotic yet I'd say that it would take considerable amount of programming skill to code it. The programmer must know this pattern to come up with a code. A rare combination i'd say.

It is important to get the code right, because after a few dull days and drawdown the entire responsibility would fall on the code to spot the pattern and take a position to end the week in profit.

To this, one may argue that this pattern entry cannot be coded as it is not a method, in a stricter sense, at all. However, there are several profitable combinations of emas, indicators and other formula which can make a good trade-able system.

For that, I can confidently say that such a system would have a subdued performance as there is nothing special about it. This system would just be a huge load of number crunching, which almost anybody has access to. In fact, whatever little profit that it may earn would only be because of the traders resolve.

Amit,

I think we maybe saying the same thing, though I am not sure about it....

If u say that a system uses 15 min pivots (maybe in addition to a lot of other patterns/data points), then do you have a consistent way of defining 15 min pivots - can u define 15 min pivots in a non-arbitrary way? If yes, then we can code it (maybe, even i can code it). U could have n number of qualifying rules for the pivot. For example, that it should L1 fractal pivot, or L2, or L3, or it should be a certain % off the previous pivot high/low, or that it should be considered only in the direction of the trend (define trend clearly), or RSI, or u might filter to ignore signals on wednesdays, or after 3 PM, or news days, or when volatility is high/low, or if previous signal was a winner, or risk is within x points, etc... whatever. shapes, sizes, ATR, occurrence in a trend, momentum and selective cases of breakout failures. If there is a clear definition, then it can be part of a mechanical system.

Else, if u say that patterns cannot be coded, then it means that the pattern is not yet defined. Taking the 15 min pivot, we might call one occurrence a pivot, and another not a pivot - for reasons like it was not visually clear, or that it was an inside pivot, etc. Then the question is whether u will consistently call it a pivot/non-pivot the every time you see it in the same context. If yes, then u have well defined rules that u just need to extract and document - and that can go into a mechanical system.

However, if there is a chance that the next time u look at the pivot, u might call it a non-pivot or vice versa, then this is subjective, and cannot form part of a consistent mechanical system (but can be part of a random mech system . It just means that u do not have a "system" at all - that it's just a gut feel approach. Such a "system" is still in the "design" phase, and not ready for implementation/execution. It means that every time u see the pattern, u mentally run a quick design iteration, and decide whether it is a pivot/non-pivot.

Just my opinion... like is it hot or cold now? why? because i feel it is hot, and i will switch on the the AC now? absolutely fine.... but if u can attach numbers (above x°C is hot), then u can have a thermostat in the AC do the work for you.

As I type, I have 2 mechanical systems running with open positions. I don't have to think about the patterns on the charts. That brainwork is not needed now, because the brainwork was done during the design phase of the systems - and I am just using the results of that brainwork...

(I can blah more, but already lot of blah...

 

[jamit_05]

As I type, I have 2 mechanical systems running with open positions. I don't have to think about the patterns on the charts. That brainwork is not needed now, because the brainwork was done during the design phase of the systems - and I am just using the results of that brainwork...

(I can blah more, but already lot of blah...

I will keep these last lines in memory

" I don't have to think about the patterns on the charts. That brainwork is not needed now, because the brainwork was done during the design phase of the systems - and I am just using the results of that brainwork..."

I think I know what I want to say, but it doesn't feel thorough. I will remember to respond to it.

T.y. for the responses.
Amit.

 

[Somatung]

many year back ,i have written an article on this, which i have lost,but brief discussion on it ,i have done before. Most contributors r right here,as per his version of story, but overall its more confusing?????
Let me help it out.
1] define first what type of trader u r. vs what type u want to be.
2] can u understand market at all?
3] can u decipher price -means what may happen in near future based on your chosen timeframe of trade
4] R u an anticipatory trader or price follower
5] what indicator u use to boost ur confidence so take a trade,how much u contribute success rate of those indicator based on ur past actual trade
6] how much mechanical/discipline u r in actual life?
.............................................................................................................

pl answer this question, as discreationary or mechanical - its trading system design.
No 1 element is YOU
next element is MARKET
third element is PRICE , price decipher is an art, with time one can learn, be it indicator based or cool observation as well as news base impact.
A learner must make extreme caution , to a novice (upto 4yr in market) Mechanical should be start pt.SLOWLY the person evolve as trader , understand- upmarket trade rule r not same as opposite of down trend.
Greed driven vs economy driven characteristics r different. So discretion comes.
Next after 6yr one faces strength of Range market (actually atleast 8month in a yr market expected now to be rangebound).........upto this one can tackle with mechanical system- up-down-sideways
But with volatility play plan, as well as for sector rotation ,u have to learn DISCRETION.
....................................
for intraday, u study EOD , that is discretion to find opportunity. But trade execution after 3min upbreak is MECHANICAL. Short at a particular high = mechanical. but to a imp pivot high , taking a 20lot short discretion comes because u evaluate it as high probability set up.
...................................
Again rethink and answer 1st six questions. -reply lies there what SUITS YOU.

@Oilman5

You know what? I love the way you explain certain topics. Why? What you post is not only adaptable to trading, it is even adaptable to real live as we live it. :clapping::thumb: Great explanations and all my respect to you.

http://www.traderji.com/members-discussion-forums/90879-reflection-trading-10.html#post934860

As I not can post there, I do make my post here.

 

[bunti_k23]

Guys thanx for discussing the concept ..as iam not that expert to understand all the things u wrote , but got the point u were trying to specify there, iam frm 3 yrs in the market only and now beginning to understand it, hats off to you guys as the red emblems represent your exp and seniority ...thank u:clap:

 

[oilman5]

@Oilman5

You know what? I love the way you explain certain topics. Why? What you post is not only adaptable to trading, it is even adaptable to real live as we live it. :clapping::thumb: Great explanations and all my respect to you.

http://www.traderji.com/members-discussion-forums/90879-reflection-trading-10.html#post934860

As I not can post there, I do make my post here.

,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,
Thanks Somatung Sir,
your expression reminds me of Danpickup , an option pro from Europe,- i recently seen ur clarity on nifty future thread.Nicely u analysed the scenario.
regards
oilman5:clap::clap:

 

[jamit_05]

As I type, I have 2 mechanical systems running with open positions. I don't have to think about the patterns on the charts. That brainwork is not needed now, because the brainwork was done during the design phase of the systems - and I am just using the results of that brainwork...

Augubhai,

The primary motivation to make trading mechanical, is to remove the work/effort from the decision making process. This is interesting on a psychological level.

One may ask himself, why would one be strained in the decision making process?

Reason 1: The decision making process is heavy and convoluted with numerous parameters?

If this is the belief-platform of the trader, then one can infer that the trader believes that more numbers, levels, indicators and averages will improve trading results. Therefore, when this trader would fail in achieving results he will go back to number crunching and analysis.

It is only a matter of time before his expectations are shattered. Success will continue to elude him till he changes his beliefs.

Reason 2: Sometimes the mind gets clouded making it difficult to spot entries and execute, esp after moderate drawdowns, hence he needs absolute objectivity so he sorts to mech sys.

This battle needs to be won on a psychological level. Instead, if the trader gets himself a pair of crutches, in the form of a mechanical system, he is doing no good. Mech sys will also give him drawdowns, probably sharper ones, then he will run back to Reason 1.

The trader fails to see that his efforts are inadequate on the psychological front, where real trading happens.