Flexible Mechanical Trading vs. Discretional Trading

Quoting Igrok

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For as long as someone places his market orders manually there is always an element of discretion exists.

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Quoting TheRealThing

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I have found that most professional traders (meaning winners) have a "way" of trading that they consistently follow, to the exclusion of any other "way". The longer they trade the more "mechanical" they get.

One of the most mechanical traders I know is in Regina, Sask. I had a hand in training him in 1987. He consistently buys new highs and sells the appropriate new lows of the market(s) he follows.

Like me, he sometimes has "seen this before" moments before a market breaks out and enters early. The rare times that it is a market fakeout, he immediately gets out without a thought other than a personal notation that he must have seen something that tricked him into the trade, and then tries to figure out what it was so as to prevent it next time.

It would be remiss to not mention that the many times that he and I have entered early versus our "system" of buying at exact new highs and selling at exact new lows has paid huge dividends, much more than the minor losses experienced from a few aborted breakouts.

Recommendation: Find a robust mechanical system with a provable edge. Then learn to beat it by using your acquired experience.

It works. I know. I've traded a GBP/USD system for more than 10 years that is little different than some on this website. It has a theoretical profit average of only 39 pips-per-week before commissions and/or spreads. By my added acquired experience from trading and understanding the way other traders trade, I've been able to average around 50 pips AFTER commissions and/or spreads.

Anyone with a calculator can tell the compounding difference this makes over any period of time. I can hear the question, "If you are able to make this much per week, how come you aren't a billionaire?"

The answer is in the phrase above, "average of only 39 pips-per-week." Drawdowns can be a bear. But with good money management, it fits in great with the other trades I make in other pairs/markets.

The opportunity is there, it just looks like hard work. Like anything worthwhile.

TheRealThing

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Quoting aparsai

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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

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Quoting TheRealThing

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Flexible Mechanical Trading
Interestingly, this thread has hit upon a little-known but powerful concept that big traders have been using forever....

I love mechanical systems. Big traders the world over love mechanical trading systems. They have to. You will see why from the example that follows.

The only way I have ever seen any small trader rise to the ranks of Big Trader-- in other words, jump a couple of trading levels-- is by having one HUGE outlier trade somewhere in their trading history, or a series of BIG trades that multiplies their account. Then, if they are prudent, they can keep trading until they can jump to an even higher level.

Mechanical systems are never superior to the best human trader who is focusing on a market.

But, they are superior in the fact that they can watch unlimited markets in unlimited timeframes better than a one human or even group of humans. And, if the mechanical system has been created by a winning trader who can come up with a reasonable market trading model based on his own discoveries, it may even be better than the average profitable trader.

Here is where mechanical systems really offer you a HUGE trading edge.

They get you in mechanically-- even if you -- a great and capable trader in your own right-- might not like the trade.

The Power of Being In

In late November of 2003 my main trading system gave me a buy signal in GBP/USD. For those who weren't trading then, the British Pound had already been gaining heavily on the US dollar for a full year and a half.

My trading brain, and most traders I knew, were not thinking at all about adding positions then. End of year, negative news, big profits already harvested, "don't screw up a good year by risking profits already gained", etc.

But, I took the trade. Put in my stops, and got ready for the "inevitable" loss. The market just jousted around for a week. Up 20 - 50 pips. Down 50 - 80 pips. Back and forth like a washing machine. News against the trade came out, the market fell, and then trickled back up. You've seen the same hundreds of times.

But it didn't hit my position stop just 120 pips away.

Then, some news came out on Wednesday the 26th, and the market started gaining new ground. And kept going. I had to trail my stops by the end of the next week. This trade that I wasn't all that excited about began to be pretty exciting.

All my trading buddys started getting very interested, but because of the perceived increased risk of being much higher in the move-- waited for a retracement to make their trades more reasonable and lower risk. Which didn't happen until a month and a half later. At which point, the volatility was so high that if they did put on any size, it was very little and the potential for them diminished dramatically.

The market kept going for 3 months from my entry. My profit on the trade was over 1900 pips. Even I couldn't believe it. I had traded a long time by that time, and had only experienced a few markets that just kept on going and going and going.

If I hadn't had a mechanical system to get me in and provide a risk/reward structure to handle the trade, I would have missed the major 15:1 reward that trade created.

With other techniques, I was able to add to the trade along the way; using my trailing stop on the initial position to follow all of my adds, I made 4 times the money that the original trade would have garnered on its own.

My example above is why large traders follow mechanical systems like many of the readers of this forum. But pros just don't let the mechanical system handle everything alone. The mechanical entry gives them a trade that they can participate in if something '"unusual" develops.

Then they can apply all of their resources to "push" the trade and make it perform even better than their mechanical system, because the brain is much more adept at solutions for a specific situation than general ones.

Mechanical systems work well on the general. So, the pros let the systems do their 'generally' good job.

This is where the ancient Greek aphorism applies to traders. "Know Thyself",
often attributed to Pythagoras.

If you "know yourself"and why you are making each trade; know that you will only take trades which have a proven profile possessing an edge, and also know you will precisely take necessary losses; you will inevitably profit in the long run.

Because, others, their opposites in the market, do not "know themselves" yet.

Best wishes on your trading concepts.

TheRealThing

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Quoting TheRealThing

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Flexible Mechanical Trading
Interestingly, this thread has hit upon a little-known but powerful concept that big traders have been using forever....

I love mechanical systems. Big traders the world over love mechanical trading systems. They have to. You will see why from the example that follows.

The only way I have ever seen any small trader rise to the ranks of Big Trader-- in other words, jump a couple of trading levels-- is by having one HUGE outlier trade somewhere in their trading history, or a series of BIG trades that multiplies their account. Then, if they are prudent, they can keep trading until they can jump to an even higher level.

Mechanical systems are never superior to the best human trader who is focusing on a market.

But, they are superior in the fact that they can watch unlimited markets in unlimited timeframes better than a one human or even group of humans. And, if the mechanical system has been created by a winning trader who can come up with a reasonable market trading model based on his own discoveries, it may even be better than the average profitable trader.

Here is where mechanical systems really offer you a HUGE trading edge.

They get you in mechanically-- even if you -- a great and capable trader in your own right-- might not like the trade.

The Power of Being In

In late November of 2003 my main trading system gave me a buy signal in GBP/USD. For those who weren't trading then, the British Pound had already been gaining heavily on the US dollar for a full year and a half.

My trading brain, and most traders I knew, were not thinking at all about adding positions then. End of year, negative news, big profits already harvested, "don't screw up a good year by risking profits already gained", etc.

But, I took the trade. Put in my stops, and got ready for the "inevitable" loss. The market just jousted around for a week. Up 20 - 50 pips. Down 50 - 80 pips. Back and forth like a washing machine. News against the trade came out, the market fell, and then trickled back up. You've seen the same hundreds of times.

But it didn't hit my position stop just 120 pips away.

Then, some news came out on Wednesday the 26th, and the market started gaining new ground. And kept going. I had to trail my stops by the end of the next week. This trade that I wasn't all that excited about began to be pretty exciting.

All my trading buddys started getting very interested, but because of the perceived increased risk of being much higher in the move-- waited for a retracement to make their trades more reasonable and lower risk. Which didn't happen until a month and a half later. At which point, the volatility was so high that if they did put on any size, it was very little and the potential for them diminished dramatically.

The market kept going for 3 months from my entry. My profit on the trade was over 1900 pips. Even I couldn't believe it. I had traded a long time by that time, and had only experienced a few markets that just kept on going and going and going.

If I hadn't had a mechanical system to get me in and provide a risk/reward structure to handle the trade, I would have missed the major 15:1 reward that trade created.

With other techniques, I was able to add to the trade along the way; using my trailing stop on the initial position to follow all of my adds, I made 4 times the money that the original trade would have garnered on its own.

My example above is why large traders follow mechanical systems like many of the readers of this forum. But pros just don't let the mechanical system handle everything alone. The mechanical entry gives them a trade that they can participate in if something '"unusual" develops.

Then they can apply all of their resources to "push" the trade and make it perform even better than their mechanical system, because the brain is much more adept at solutions for a specific situation than general ones.

Mechanical systems work well on the general. So, the pros let the systems do their 'generally' good job.

This is where the ancient Greek aphorism applies to traders. "Know Thyself",
often attributed to Pythagoras.

If you "know yourself"and why you are making each trade; know that you will only take trades which have a proven profile possessing an edge, and also know you will precisely take necessary losses; you will inevitably profit in the long run.

Because, others, their opposites in the market, do not "know themselves" yet.

Best wishes on your trading concepts.

TheRealThing

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Quoting rsq955

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I know that this is an older post, but I feel that a lot of people can benefit from the knowledge that is inside of it...............Read it 3,4....100 times over...it is great stuff. Take Care everyone...............read it again.


Rsq955

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