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Flexible Mechanical Trading vs. Discretional Trading

  • #41
  • Jan 9, 2007 12:36pm Jan 9, 2007 12:36pm
Quoting Trader1580
you're right. Strategy is on the very bottom of my trading principles. I put, risk management, money management, emotion/physcological management way before strategy. Strategies come and go such like markets change.

You're right, in the end, no two trades are a like, and one does not have to know what's going to happen next to put on a trade. One has to be emotionally stable and rational, and that itself is, I believe, where the 5% are skilled to the point they are fluent with the flow of the market.

A great trader trades like a new trader, carefree and emotionally free.


Along with risk management, money management, PHYSCHOLOGICAL management is HUGE too.

One has to remember that just because no two trades are the same does not mean you will automatically neglect and stop researching and reading fundamentals and technicals. You just have to accept confidently and understand entirely that you can't EXPECT anything and anything can happen. You can make educated projections but you can't EXPECT them to happen.

This is a great discussion as I believe the psychological management is way undervalued in trading.
I'm with you.

One of the reasons that I like to automate my mechanical systems is to reduce the effect of emotions. I usually let my system run 24 hours a day and I check out the results not more than twice a day. The reason that I visit my trading platform is just to make sure everything is up and running. This helps me to be less involved with emotions and be more focused on developing new ideas and enhance my trading methods.

There are many people who do not beleive in automated trading. That's fine with me. However, I should indicate that a complete automated trading system is the one that considers money management and risk management techniques along with a proper entry/exit strategy.
  • #42
  • Jan 9, 2007 12:50pm Jan 9, 2007 12:50pm
Quoting aparsai
I'm with you.

One of the reasons that I like to automate my mechanical systems is to reduce the effect of emotions. I usually let my system run 24 hours a day and I check out the results not more than twice a day. The reason that I visit my trading platform is just to make sure everything is up and running. This helps me to be less involved with emotions and be more focused on developing new ideas and enhance my trading methods.

There are many people who do not beleive in automated trading. That's fine with me. However, I should indicate that a complete automated trading system is the one that considers money management and risk management techniques along with a proper entry/exit strategy.
I would love to have a system that incorporates the fundamentals without the emotions. Can you give an example in your automated system where it incorporates risk management and money management?

The first thing that came to my mind is defined entry, exit points, and if the market goes your way, have take profit points or add to them?

aparsai, just wondering for fun, how long did it take or what was the enlightment moment where you incorprated psychological meta-cognition or awareness as one of them fundamentals? This is truely a milestone that seperates the 95% and the professional consistent traders.
  • #43
  • Jan 9, 2007 1:11pm Jan 9, 2007 1:11pm
Quoting merlin
i chose "i don't know" for one very important reason.

mechanical trading IS discretionary trading!

i didnt even realize this until many years into my trading career. but think about it....think of how many decisions the mechanical system trader must make. there are THOUSANDS of decisions you make, and on a daily basis too!!! not only all the decisions that go into the building of your system, but also the money managment aspect, position sizing, what pairs to trade, how often you will change the system, when you will stop using the system, when the system has "proved" itself, what basket of systems to trade, i could go on and on.

we call it mechanical trading, but how "mechanical" is it really?? and what is the real difference between a mechanical and dicretionary trader?

The real difference is in emotions and the perception of information that the market provides from a neutral standpoint. Emotional pain is different from physical pain as emotional pain has to be interpreted to have an effect. If we both fell, we both would experience physical pain whereas if a stranger insults you in a different language that I have never heard of but whereas you are fluent, you can experience the emotional pain whereas I may find it entertaining. It is the interpretation, and at large, emotions that seperates the mechanical from the discretionary. To gain the perspective of a real trader's mind set free of emotional clutter, understanding that anything can happen, random distribution, and think in probabilities is extremely hard to understand yet to integrate it to oneself in an efficient, resistance-free pratical skill when trading as some of the utmost important concepts in trading are the very opposite in human nature.
  • #44
  • Jan 9, 2007 1:16pm Jan 9, 2007 1:16pm
Quoting Trader1580
I would love to have a system that incorporates the fundamentals without the emotions. Can you give an example in your automated system where it incorporates risk management and money management?

The first thing that came to my mind is defined entry, exit points, and if the market goes your way, have take profit points or add to them?

aparsai, just wondering for fun, how long did it take or what was the enlightment moment where you incorprated psychological meta-cognition or awareness as one of them fundamentals? This is truely a milestone that seperates the 95% and the professional consistent traders.
If you allow me I do not speak about myself here at this thread. I prefer to hear from experts like you about the general idea of mechanical vs. discretional trading. My hungry mind needs to learn more from you guys.

You may refer to my journal for more information about my trading method. I would be more than happy to answer more personal questions over there or through PMs and/or emails.
  • #45
  • Jan 9, 2007 1:23pm Jan 9, 2007 1:23pm
Quoting aparsai
If you allow me I do not speak about myself here at this thread. I prefer to hear from experts like you about the general idea of mechanical vs. discretional trading. My hungry mind needs to learn more from you guys.

You may refer to my journal for more information about my trading method. I would be more than happy to answer more personal questions over there or through PMs and/or emails.
Of course, and I will take you take a look at your EA system at my leisure as automated trading has always been interesting to me.

Kindly and respectfully, I did not intend to direct the question to you in any harming way. I sincerely apologize if I did. We are all students of the market. I was curious as many traders who make the transition/realization is a very facinating experience.
  • #46
  • Jan 9, 2007 1:28pm Jan 9, 2007 1:28pm
Quoting Trader1580
Of course, and I will take you take a look at your EA system at my leisure as automated trading has always been interesting to me.

Kindly and respectfully, I did not intend to direct the question to you in any harming way. I sincerely apologize if I did. We are all students of the market. I was curious as many traders who make the transition/realization is a very facinating experience.
No need to apologize. I didn't feel bad at all. I just want to keep on track here at this thread. It's growing very fast and I'm quite sure that there are a lot of things that we can understand from the discussion. The least outcome would be to clarify the definition of discretional and mechanical trading. I'm happy that you and others joined the discussion and I encourage you to continue posting here.

Thanks again.
  • #47
  • Jan 9, 2007 1:36pm Jan 9, 2007 1:36pm
Quoting aparsai
No need to apologize. I didn't feel bad at all. I just want to keep on track here at this thread. It's growing very fast and I'm quite sure that there are a lot of things that we can understand from the discussion. The least outcome would be to clarify the definition of discretional and mechanical trading. I'm happy that you and others joined the discussion and I encourage you to continue posting here.

Thanks again.
likewise
  • #48
  • Jan 9, 2007 9:01pm Jan 9, 2007 9:01pm
Quoting Trader1580
real difference is the emotions. Mechanical trader has no emotions, does not take action / or not take action based on emotions.
if you have ever been faced with the decision of whether or not to stop trading a mechanical system (because the drawdown is past tested limit), and you can tell me you have no emotion, then you also would have no emotion when trading discretionary. its the same feeling in my experience.
Relax and be happy.
  • #49
  • Jan 9, 2007 9:05pm Jan 9, 2007 9:05pm
Quoting aparsai
Maybe the word "discretion" is a little bit misleading.
yeah that was kind of my point i was getting at..

to me, a quantitative trader is a discretionary trader who bases their trade decisions on math. a fundamental trader is a discretionary trader who bases their trades decisions on news, market feel, etc.

both the quant and fundie trader may both use math to do position sizing, but the distinction i see is that the quant bases trades on math.
Relax and be happy.
  • #50
  • Jan 10, 2007 7:48am Jan 10, 2007 7:48am
Quoting merlin
yeah that was kind of my point i was getting at..

to me, a quantitative trader is a discretionary trader who bases their trade decisions on math. a fundamental trader is a discretionary trader who bases their trades decisions on news, market feel, etc.

both the quant and fundie trader may both use math to do position sizing, but the distinction i see is that the quant bases trades on math.
Now I understand what you mean. However, back to mechanical/discretional trading we could say that mechanical trader (whether technical or fundamental) sets up his/her trading rules which are by the way very detailed and stick with them during the initiating, continuation, and exiting a trade. This person revisits the rules every now and again and make changes according to past results or new ideas or experiments.

On the other hand a discretional trader doesn't have those strict rules in place. The way he/she trades everytime depends on what he/she feels is alright. To me this is the big difference.
  • #51
  • Jan 10, 2007 7:01pm Jan 10, 2007 7:01pm
Quoting aparsai
Now I understand what you mean. However, back to mechanical/discretional trading we could say that mechanical trader (whether technical or fundamental) sets up his/her trading rules which are by the way very detailed and stick with them during the initiating, continuation, and exiting a trade. This person revisits the rules every now and again and make changes according to past results or new ideas or experiments.

On the other hand a discretional trader doesn't have those strict rules in place. The way he/she trades everytime depends on what he/she feels is alright. To me this is the big difference.
it is a big difference. The mechanical trader is like a casino, not the player. A casino has an edge (rules of the game) that tips in their favor. Over time, and over a large sample, the edge will turn out to be profitable for them- consistently. That's why a casino never needs to know what's going to happen at any moment at the micro level because they believe and it's true, that at the macro level, they will come out on top.

There are an infinite number of market variables that by trading "discretionary" is trading by feeling, emotions, no dicipline.

It does not take any skill to put on a winning trade, and the discretionary trader may guess right (for example, if one feels NFP is down, buy the euro before it reports), the difference here is CONSISTENCY.
  • #52
  • Jan 10, 2007 8:11pm Jan 10, 2007 8:11pm
Hello Aparsai,

I voted for mechanical trading for myself. Although I am constantly trying to test any new ideas that is floating around on the internet, I haven't changed my system since it is running live.(Despite a larger drawdown than previously tested)

However I have to point out one thing that I agree with Merlin. That is "to stop the mechanical trading" is discretional trading. Likewise to "change the parameter of the original rules" is also discretional trading. Because you have the "feeling" that those changes are better.

If the person revisit the rules every now and again and make changes, he is discretional trader. However if the "original" rules (backtested) already include a certain rule that says "certain parameters need to be tested every now and again and according to the testing results (whether it is drawdown, profit, or whatever), certain change has to be made." If that kind of rule has been made and well backtested the "efficiency" and you do the adjustment according to that rule. Then you can say you are a fully machnical trader. Because you don't need to use your own "discretion" to change those parameters.

One of the problem people failed on an EA trading is because they changed their own setting on their own discretion. If you have chance to read through the Hans 123 breakout method in strategybuilderfx, then you will find out that a lot of people make changes to the system with their own discretion but didn't achieve anything.

Have a happy trading and development of your EA.~~

Quoting aparsai
This person revisits the rules every now and again and make changes according to past results or new ideas or experiments.
  • #53
  • Jan 10, 2007 8:17pm Jan 10, 2007 8:17pm
Quoting Puppy
Hello Aparsai,

I voted for mechanical trading for myself. Although I am constantly trying to test any new ideas that is floating around on the internet, I haven't changed my system since it is running live.(Despite a larger drawdown than previously tested)

However I have to point out one thing that I agree with Merlin. That is "to stop the mechanical trading" is discretional trading. Likewise to "change the parameter of the original rules" is also discretional trading. Because you have the "feeling" that those changes are better.

If the person revisit the rules every now and again and make changes, he is discretional trader. However if the "original" rules (backtested) already include a certain rule that says "certain parameters need to be tested every now and again and according to the testing results (whether it is drawdown, profit, or whatever), certain change has to be made." If that kind of rule has been made and well backtested the "efficiency" and you do the adjustment according to that rule. Then you can say you are a fully machnical trader. Because you don't need to use your own "discretion" to change those parameters.

One of the problem people failed on an EA trading is because they changed their own setting on their own discretion. If you have chance to read through the Hans 123 breakout method in strategybuilderfx, then you will find out that a lot of people make changes to the system with their own discretion but didn't achieve anything.

Have a happy trading and development of your EA.~~
that's taking the two definitons in a broader context. Which Merlin points out which perspective you take. The posts I made above refers to the trading system itself, not at large.
  • #54
  • Jan 11, 2007 10:33am Jan 11, 2007 10:33am
Quoting Puppy
Hello Aparsai,

I voted for mechanical trading for myself. Although I am constantly trying to test any new ideas that is floating around on the internet, I haven't changed my system since it is running live.(Despite a larger drawdown than previously tested)

However I have to point out one thing that I agree with Merlin. That is "to stop the mechanical trading" is discretional trading. Likewise to "change the parameter of the original rules" is also discretional trading. Because you have the "feeling" that those changes are better.

If the person revisit the rules every now and again and make changes, he is discretional trader. However if the "original" rules (backtested) already include a certain rule that says "certain parameters need to be tested every now and again and according to the testing results (whether it is drawdown, profit, or whatever), certain change has to be made." If that kind of rule has been made and well backtested the "efficiency" and you do the adjustment according to that rule. Then you can say you are a fully machnical trader. Because you don't need to use your own "discretion" to change those parameters.

One of the problem people failed on an EA trading is because they changed their own setting on their own discretion. If you have chance to read through the Hans 123 breakout method in strategybuilderfx, then you will find out that a lot of people make changes to the system with their own discretion but didn't achieve anything.

Have a happy trading and development of your EA.~~
Puppy,

As I mentioned so far the problem is with the word "discretion". It's not very clear. You are right a person who constantly make changes to a mechanical system (whether authomated or not) is a discretional trader. But a mechanical trader has the right to revist his/her method of trade every now and again and make corrections and necessary changes. It has nothing to do with discretional trading because when this person enters a trade enters and exits based on the mechanical rules he/she has in place. That's why I tried to come up with the idea of flexible mechanical trading. A method that is something between so called "mechanical" and "discretional" method. Such method learns from the market and corrects itself.

Good Luck,
Al
  • #55
  • Jan 11, 2007 11:42am Jan 11, 2007 11:42am
Quite interesting discussion, but the choice between "black" and "white" leaves aside all the gray tones, which are likely to be closer to the truth as always. Good and effective trading strategy may include some elements from both approaches, mechnical and discretionary. I do trade something in between and the results look satisfactory so far.
  • #56
  • Jan 11, 2007 7:58pm Jan 11, 2007 7:58pm
Quoting Igrok
Quite interesting discussion, but the choice between "black" and "white" leaves aside all the gray tones, which are likely to be closer to the truth as always. Good and effective trading strategy may include some elements from both approaches, mechnical and discretionary. I do trade something in between and the results look satisfactory so far.
I prefer to eliminate the discretional trading completely but to be honest with you there are occasions that I can't resist the temptation. For example if I see a gap that I believe will be filled in a few hours, I usually take the risk and trade it. It's totaly discretional but something inside me says go for it. (The Confessions of a Mechanical Trader ).
  • #57
  • Jan 12, 2007 2:53am Jan 12, 2007 2:53am
Quoting aparsai
For example if I see a gap that I believe will be filled in a few hours, I usually take the risk and trade it. It's totaly discretional but something inside me says go for it. (The Confessions of a Mechanical Trader ).
Gaps do work more often than not, but you never know how long it might take to cover them. For instance, there is still a gap on the euro sitting at 1.0520 and only G-d knows when it gets covered eventually.
  • #58
  • Jan 12, 2007 9:29am Jan 12, 2007 9:29am
Quoting Igrok
Gaps do work more often than not, but you never know how long it might take to cover them. For instance, there is still a gap on the euro sitting at 1.0520 and only G-d knows when it gets covered eventually.
I just said that as an example. I should confess that it's not always successful but it's a temptation you know.
  • #59
  • Jan 13, 2007 1:16am Jan 13, 2007 1:16am
I hope more members get involved in the discussion. It can help us to know ourselves better or probably find a better way to trade.

Good Luck and thanks for your participation.
  • #60
  • Jan 14, 2007 1:39am Jan 14, 2007 1:39am
I don't have a system it's a strategy. It's simple and there's a lot of discretion involved, but I never deviate from it.

I think most people are discretionary because developing a mechanical system takes more work.
How you act is more important than how you feel.
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