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Flexible Mechanical Trading vs. Discretional Trading

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  • What type of trader are you?
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  • #1
  • First Post: Jan 8, 2007 10:51am Jan 8, 2007 10:51am
Let me define a couple of phrases before moving forward. These are my relatively new perception of these phrases. Please correct me if I'm mistaken:

Mechanical Trading: You have a system in place and you are always committed to trade based on that system. So if there is a trade opportunity based on that system you enter the market immediately. You exit the market only if the system tells you to do so.

Discretional Trading: You may or may not use a trading system but even if you use a trading system you may enter or exit the market at your own discretion. For example if you enter the market and it moves against you even if the system tells you not to exit, you do exit to avoid further losses.

The altimate mechanical system is the one that is handled by your computer rather than you so you won't interfere with the system decisions.

I hear from many people that "discretional trading" might be useful in short term but in long term it is the mechanical trader who wins. However, discretional trades argue that market is a dynamic entity and no system can last forever. That's why you need your own discretion to decide what to do.

Based on all those arguments I was thinking what if we could have a flexible mechanical trading system in place. In my opinion such system uses sophisticated trading tools to recognize points of entry and exit for each trade and applies money management tools to maximize profit and limit losses. It's somewhat similar to discretion trading in a sense but the flexibility is an inheritance of the system rather than the decision of the user of the system.

By accepting this idea you can actually develop an automated mechanical system than envisions the market movements but when it enters the market it decides what to do if the price moves either in its direction or against it. It won't replicate the human mind for sure but on the other hand the element of human feelings is eliminated.

What are your ideas?
  • #2
  • Jan 8, 2007 11:20am Jan 8, 2007 11:20am
Hello.

It apears that we are both looking for the same kind of system. A sytem that is mechanical(meaning programmable) yet still being adaptive to the current market conditions. I believe such a system is out there somewhere waiting to be discovered.

A good example would be the turtle system where everything is derived from N, or ATR. which tries to identify the volatility of the market, Its adaptive because nothing is static, from the allocation of lotsizes and the distance of stops are all dynamic looking at the markets volatility to decide everything. But this sytem is not completely flexible because of the fact that turtle entry relies on breakout which spell disaster during ranging markets.

I also experemented with EMA cross, we all know the EMA only works when market is trending yet when the market is ranging it suffers consecutive losses. So I realized when I see the market is ranging simply reverse the condition of the EMA and it will still make money. The question is how will a mechanical system realize wether the market is ranging or trending?

A human can immediately know that the market is ranging when he looks at the chart, but how can a program know this?

I Also noticed that EAs(mechanical systems) are generally designed for either a ranging market or a trending market. but i havnt found an EA that is profitable in both market conditions.

So right now I am in the search to be able to mechanically identify when the market is ranging or when it is trending, because I believe if we could find this a "Flexible Mechanical Trading System" could also be easily created.

kind regards and a firm handshake,
Mikhail
  • #3
  • Jan 8, 2007 1:00pm Jan 8, 2007 1:00pm
Quoting mikhaildgreat
Hello.

It apears that we are both looking for the same kind of system. A sytem that is mechanical(meaning programmable) yet still being adaptive to the current market conditions. I believe such a system is out there somewhere waiting to be discovered.

A good example would be the turtle system where everything is derived from N, or ATR. which tries to identify the volatility of the market, Its adaptive because nothing is static, from the allocation of lotsizes and the distance of stops are all dynamic looking at the markets volatility to decide everything. But this sytem is not completely flexible because of the fact that turtle entry relies on breakout which spell disaster during ranging markets.

I also experemented with EMA cross, we all know the EMA only works when market is trending yet when the market is ranging it suffers consecutive losses. So I realized when I see the market is ranging simply reverse the condition of the EMA and it will still make money. The question is how will a mechanical system realize wether the market is ranging or trending?

A human can immediately know that the market is ranging when he looks at the chart, but how can a program know this?

I Also noticed that EAs(mechanical systems) are generally designed for either a ranging market or a trending market. but i havnt found an EA that is profitable in both market conditions.

So right now I am in the search to be able to mechanically identify when the market is ranging or when it is trending, because I believe if we could find this a "Flexible Mechanical Trading System" could also be easily created.

kind regards and a firm handshake,
Mikhail
Mikhail,

Thanks for your comments. I'm confident that there are many "flexible mechanical" systems out there. I've already built one.

The question is, if you find such a system do you become a mechanical trader then?

I also want to know whether FF members believe that mechanical trading is better than discretional trading or not? If we move the discussion toward comparing mechanical and discretional trading it would be really beneficial to everybody. It would be great to let us know why you think one of those approaches are better.

I hope to hear more from you and others.
  • #4
  • Jan 8, 2007 1:16pm Jan 8, 2007 1:16pm
my answer would be discretional with discipline. Which means sticking to your system... but as far as having an app or bot programed to that for me .. I think there are just to many variables changing to keep the app or bot lubed
  • #5
  • Jan 8, 2007 1:29pm Jan 8, 2007 1:29pm
Quoting turbokaos
my answer would be discretional with discipline. Which means sticking to your system... but as far as having an app or bot programed to that for me .. I think there are just to many variables changing to keep the app or bot lubed
turbokaos,

Thanks for your comment. What do you exactly mean by discretional with discipline? To me if you add the element of discipline to a discretional approach you've actually built a system. This means that you are a mechanical trader. Please correct me if I'm wrong and elaborate on your point of view.

Thanks,
Al
  • #6
  • Jan 8, 2007 2:36pm Jan 8, 2007 2:36pm
Quoting aparsai
Mikhail,
Thanks for your comments. I'm confident that there are many "flexible mechanical" systems out there. I've already built one.

The question is, if you find such a system do you become a mechanical trader then?
Yes, a flexible mechanical trading system is still mechanical trading. What I understand, a mechinical trading system is a sytem built purely from logic, No human emotion is envolved. No matter how complex the logic of the system may be as long as decisions are based from reason and no "gut feeling" and random guessing is envolved in the decision making then I would clasify it as mechanical.

Quoting aparsai
I also want to know whether FF members believe that mechanical trading is better than discretional trading or not? If we move the discussion toward comparing mechanical and discretional trading it would be really beneficial to everybody. It would be great to let us know why you think one of those approaches are better.

I hope to hear more from you and others.
I most definitely believe that mechinacal trading is the only way to go. discretional trading is just like playing black jack without knowing how to count cards, you just place your bets depending on how you feel at that given moment. while mechanical traders are like black jack card counters, they place their bets based on probabilites and odds. In the long run the gamblers always give their money to the house, while card counters make a living out of it.

Kind regards,
Mikhail
  • #7
  • Jan 8, 2007 2:48pm Jan 8, 2007 2:48pm
Strictly mechanical systems are mathematical in nature. Thus, 2+2 always = 4. The markets do not work this way. Whenever I read posts that say things like "never deviate from your system" or "try to trade with no discretion", it usually signifies that the trader writing the post is either inexperienced, or just plain ignorant. EA's have their place, but only when they are managed by the trader. They cannot be allowed to run on full autopilot, because they will eventually blow out the account. This has been my observation over the years and is solely my opinion... no offense.
  • #8
  • Jan 8, 2007 2:49pm Jan 8, 2007 2:49pm
Quoting aparsai
turbokaos,

Thanks for your comment. What do you exactly mean by discretional with discipline? To me if you add the element of discipline to a discretional approach you've actually built a system. This means that you are a mechanical trader. Please correct me if I'm wrong and elaborate on your point of view.

Thanks,
Al
If I had 100% mechanical system I woun't have to sit hear all day or have at least alarms sound or phone me...lol

There for it discretional casue I might have adjust a trade other wise i would just set it and go to the beach all day... and i don't see that ever happening....

I think there is better odds in having a mechanical system play black jack online


turbo 2cents
  • #9
  • Jan 8, 2007 2:50pm Jan 8, 2007 2:50pm
Interesting thread....

As some of you know I use a method or system that has built in rules that I never waver from so in that sense it is mechanical in nature.

However, on entering a new trade I use what I have learnt so far in my fledgling trading career as to the direction of my new position.

Does that mean it's mechanical or discretionary - it certainly couldn't be programmed into an EA.

Kind Regards
Steve
  • #10
  • Jan 8, 2007 2:53pm Jan 8, 2007 2:53pm
Quoting steviet
Interesting thread....

As some of you know I use a method or system that has built in rules that I never waver from so in that sense it is mechanical in nature.

However, on entering a new trade I use what I have learnt so far in my fledgling trading career as to the direction of my new position.

Does that mean it's mechanical or discretionary - it certainly couldn't be programmed into an EA.

Kind Regards
Steve
It is discretionary.
  • #11
  • Jan 8, 2007 3:26pm Jan 8, 2007 3:26pm
Quoting mikhaildgreat
Yes, a flexible mechanical trading system is still mechanical trading. What I understand, a mechinical trading system is a sytem built purely from logic, No human emotion is envolved. No matter how complex the logic of the system may be as long as decisions are based from reason and no "gut feeling" and random guessing is envolved in the decision making then I would clasify it as mechanical.



I most definitely believe that mechinacal trading is the only way to go. discretional trading is just like playing black jack without knowing how to count cards, you just place your bets depending on how you feel at that given moment. while mechanical traders are like black jack card counters, they place their bets based on probabilites and odds. In the long run the gamblers always give their money to the house, while card counters make a living out of it.

Kind regards,
Mikhail
I quite agree with you. There is an exception though. There are some professional traders out there that are trading for a life. These guys sense the movements of the market and decide what to do. They are probably the only group of trades that can be long term profitable discretaional trades.

Although I'm a mechanical trading follower I should admit that if you pass a certain level of experience you may also be a successful discretional trader. In my opionion discretional trading is the enemy of newbies.
  • #12
  • Jan 8, 2007 3:32pm Jan 8, 2007 3:32pm
Quoting mr.marketz
Strictly mechanical systems are mathematical in nature. Thus, 2+2 always = 4. The markets do not work this way. Whenever I read posts that say things like "never deviate from your system" or "try to trade with no discretion", it usually signifies that the trader writing the post is either inexperienced, or just plain ignorant. EA's have their place, but only when they are managed by the trader. They cannot be allowed to run on full autopilot, because they will eventually blow out the account. This has been my observation over the years and is solely my opinion... no offense.
That's why I'm trying to introduce the concept of "flexible mechanical trading". You may setup rules that change their nature based on the market behaviour. Such systems are not discretional but they adapt themeselves to market movement.

Let me give you an example outside the trading world. A robot can be a flexible mechanical system. Although it is designed based on some rules it can respond to changes around it. There are some robots that even learn new things and enhance their behaviour accordingly.

I have no doubt that market is a dynamic entity but the question is how do you guarantee that a discretional trader changes his/her behaviour according to market changes. I hope you got my point.
  • #13
  • Jan 8, 2007 3:35pm Jan 8, 2007 3:35pm
Quoting turbokaos
If I had 100% mechanical system I woun't have to sit hear all day or have at least alarms sound or phone me...lol

There for it discretional casue I might have adjust a trade other wise i would just set it and go to the beach all day... and i don't see that ever happening....

I think there is better odds in having a mechanical system play black jack online


turbo 2cents
Dont' get me wrong. Having a mechanical system in place doesn't mean you have nothing to do. First of all you need to revise your system and enhance it constantly. You also need to make sure that your broker does not interfere with the decisions your system make. There are also some people that are manual mechanical trades. Those guys need to watch the charts constantly just like discretional traders.

It's all about being more profitable.
  • #14
  • Jan 8, 2007 3:40pm Jan 8, 2007 3:40pm
Quoting aparsai
Dont' get me wrong. Having a mechanical system in place doesn't mean you have nothing to do. First of all you need to revise your system and enhance it constantly. You also need to make sure that your broker does not interfere with the decisions your system make. There are also some people that are manual mechanical trades. Those guys need to watch the charts constantly just like discretional traders.

It's all about being more profitable.
Don't get me wrong but revising or enhancing would then be using discretion when or not when to do this no more diff then If you system said your target was 200 more pips to go but instead you said I'll chop it here and just take the +342...
  • #15
  • Jan 8, 2007 3:48pm Jan 8, 2007 3:48pm
Quoting turbokaos
Don't get me wrong but revising or enhancing would then be using discretion when or not when to do this no more diff then If you system said your target was 200 more pips to go but instead you said I'll chop it here and just take the +342...
By revising I didn't mean that. When I say you revise your mechanical system I mean you can make it more flexible to the market movements or more efficient. You my also make it compatible with new rules set by your broker or a new broker that you are using.

A system that uses a fixed number of pips for TP or SL is not a "flexible mechanical" system.
  • #16
  • Jan 8, 2007 5:28pm Jan 8, 2007 5:28pm
Quoting aparsai
I quite agree with you. There is an exception though. There are some professional traders out there that are trading for a life. These guys sense the movements of the market and decide what to do. They are probably the only group of trades that can be long term profitable discretaional trades.
I quite disagree, although I don't have any evidence. I belive that on the long term discretional trading is more profitable than mechanical trading. Markets are moved by human brains not computers, you can refine an algorithm to take advantage of a "mechanical" market pattern but it will not work indefinitely. Funny that I'm a professional programmer but trading is one area that I would not put my money in the hands of a computer program. Of course this is my belief, different market views are what move the markets afterall .

Later edit:
You say discretional trading is the enemy of the newbies. I say it is the enemy of the newbies only in the beginning, when they learn about the markets and about themeselves. Why would anyone think that a newbie can start trading and making consistent profits right from the beginning? Sheesh... there is a lot of time and study to invest in this trading field before consistent profits can be really capitalized, in spite of what forex ads and many "professional" traders say.
-soso
  • #17
  • Jan 8, 2007 6:11pm Jan 8, 2007 6:11pm
Quoting soso_beton
I quite disagree, although I don't have any evidence. I belive that on the long term discretional trading is more profitable than mechanical trading. Markets are moved by human brains not computers.
.
that is 2 of us that think that way
With a break always expect a pullback, otherwise, you're dead meat/
  • #18
  • Jan 8, 2007 7:40pm Jan 8, 2007 7:40pm
Quoting soso_beton
I quite disagree, although I don't have any evidence. I belive that on the long term discretional trading is more profitable than mechanical trading.
That's the problem. Neither you nor anybody else can provide me or others with evidence that discretional trading is really profitable in long term. I have at least one reference (I do not insist that this quote is correct but it's probably better than no evidence).

"The Turtles had a lot of reasons to be confident in the rules they were given. For the most part, we had the confidence to follow them even during losing periods. Those who didn’t consistently follow the rules didn’t make money and were dropped from the program." (excerpt from "The Original Turtles Rules")

Please keep in mind that the majority of Forex trades (probably 90%+) are losers and apparantly most of them are discretional traders.

Quote
Markets are moved by human brains not computers, you can refine an algorithm to take advantage of a "mechanical" market pattern but it will not work indefinitely. Funny that I'm a professional programmer but trading is one area that I would not put my money in the hands of a computer program. Of course this is my belief, different market views are what move the markets afterall ..

I agree with you. There is no rigid mechanical system that can make money forever. However, it's quite acceptable if you review and update your trading system from time to time. You are a developer and you know that even programming languages has evolved within the last few years. This is the beauty of trading a battle between you as the mechanical trader and the market. You constantly enhance your system and the market constantly changes its behaviour.

In my opinion if you build a flexible mechanical system you give it the chance to change it's decisions based on market conditions so it approaches the discretional trading without being affected by human emotions. Even such a system needs to be reviewed from time to time.

Quote
Later edit:
You say discretional trading is the enemy of the newbies. I say it is the enemy of the newbies only in the beginning, when they learn about the markets and about themeselves. Why would anyone think that a newbie can start trading and making consistent profits right from the beginning? Sheesh... there is a lot of time and study to invest in this trading field before consistent profits can be really capitalized, in spite of what forex ads and many "professional" traders say.

I agree with you but I insist that discretional trading is the enemy of the newbies.



  • #19
  • Jan 8, 2007 8:19pm Jan 8, 2007 8:19pm
"The Turtles had a lot of reasons to be confident in the rules they were given. For the most part, we had the confidence to follow them even during losing periods. Those who didn’t consistently follow the rules didn’t make money and were dropped from the program." (excerpt from "The Original Turtles Rules")


Funny enough, someone on the TSD site has created an EA based on The Turtle's methodology... and it does not seem to be generating the kind of results one would expect. As far as a newbies worst enemy goes: I think it's their inability (or fear) of putting on a trade strictly based on a natural gut feeling. It is natural for a human to attempt to avoid taking responsibility for their actions. This where EA's are a god sent... but they don't get "gut feelings". How do you program those? In your last response you had mentioned that an EA can be programmed to adapt to recent conditions... I am curious how the programming logic would work for something like that.
  • #20
  • Jan 8, 2007 9:18pm Jan 8, 2007 9:18pm
Quoting mr.marketz
"The Turtles had a lot of reasons to be confident in the rules they were given. For the most part, we had the confidence to follow them even during losing periods. Those who didn’t consistently follow the rules didn’t make money and were dropped from the program." (excerpt from "The Original Turtles Rules")


Funny enough, someone on the TSD site has created an EA based on The Turtle's methodology... and it does not seem to be generating the kind of results one would expect. As far as a newbies worst enemy goes: I think it's their inability (or fear) of putting on a trade strictly based on a natural gut feeling. It is natural for a human to attempt to avoid taking responsibility for their actions. This where EA's are a god sent... but they don't get "gut feelings". How do you program those? In your last response you had mentioned that an EA can be programmed to adapt to recent conditions... I am curious how the programming logic would work for something like that.
I'm not a turtle trader. It was the only quote that came to my mind when I wanted to show that mechanical trading is probably a better option. I'm also not quite sure if the EA you are talking about exactly followes the turtle rules. Unfortunately most of the EA's that are available to the public are not sophisticated enough to react properly to all market conditions.

I agree with you that one of the greatest challenges that newbies face is how to overcome their fears but my question is what are the rules of discretional trading. How do you teach a newbie to trade without having a set of strict rules in place? I believe and insist that discretional trading is good for the professionals only. A newbie might blow out his/her account several time before learning how to make correct decisions.

Computer programs are not limited to the iterative methods. Artificial intelligence (AI) is a serious branch of computer programming. With AI in place you can expect a computer program to be able to adapt itself to the environment. AI techniques can help a program to recognize the market patterns and make decsions based on that. Keep in mind that such system never forget the data and logically decide what to do. No immotions involved.

Even if you ignore AI systems you can develop sophisticated applications that analyze past data and change their decisions accordingly. It's very similar to discretional trading but again an immotionless approach.

Let me give you an example. Suppose I develop a trading program that shows relatively acceptable results in backtesting and forward testing. I start trading live with this system. Everytime it enters and exits the market it registers market information in a database. It stores data that resulted in taking the trade (such as indicators, price, etc.). It also stores other relevant data. Then it reviews the database and tries to find a better way to trade. Based on the new information it changes the way it trades. Everytime a new trade takes place it becomes more experieced and probably makes better decisions. Such system is working restlessly 24/7 and anlyzes millions of pieces of information to find the best possible way.

I do not devalue the power of mind and accept that a professional discretional trader can be quite successful. However, don't forget that successful computer programs are also written by human beings and are the outcome of intelligent minds.
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