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Mechanical vs. Discretionary

  • #1
  • First Post: Sep 19, 2011 4:42am Sep 19, 2011 4:42am
In our search for the ultimate system, whether developed on our own or by another, we come across two distinct forms of systems. The first is Mechanical, where the system indicates an entry, we the trader ask no questions and enter the trades based upon the predefined rules. The second is Discretionary, where the system indicates an entry, we the trader review the results then decides whether or not to 'pull the trigger'. Two distinct methods with both mental and trade benefits.

In Mechanical systems, the trader is freed from many psychological issues associated with trading. The first and foremost being fear. In this case the trader acknowledges the capabilities of the system. Thus being able to leave fear at the door, so to speak.

However, in a Mechanical system a lot less of the trend is captured as the system needs to be loose enough to reduce whip-saws while still capturing as much trend as is possible. This results in fewer PiPs captured over the course of a given trend with the benefit of higher overall consistency, as the discretion of the trader is removed from the equation.

A Discretionary system, while providing clear guidelines allows the trader to decide whether or not to place the trade. This allows an amount of unknown and or fear into the equation. A question is now available that wasn't found within a Mechanical system. "Was I a factor in the trades success or failure?" This question if found to be negative can breed fear. A fear if left unchecked can in itself be detrimental to the trader.

However, there is a benefit to discretionary trading. A Discretionary system can be tighter fitting to the trend, allowing for a greater quantity of PiPs to be captured. This has an obvious result of larger gains with better Risk to Return ratios. But, what happens to consistency? Can consistency ever be as, well consistent, as a Mechanical system?

The above is a very simplistic explanation of Mechanical and Discretionary trading. It is my hope that veterans and beginners alike will offer insights that may help other traders discover which form their system should take.
  • #2
  • Sep 19, 2011 5:48am Sep 19, 2011 5:48am
so sick of threads with copy pasted garbage!

discretionary is a bullshit term used by those who can't clearly define certain aspects of their ruleset.

the end.
Congratulations ScalaFX for coming out of the closet!
  • #3
  • Sep 19, 2011 5:50am Sep 19, 2011 5:50am
Discretionary trading can be very profitable so long as the trader is in the zone, where they can feel the pulse of the market and respond quickly to every event.

The zone is the perfect place to be, but we can exit the zone on either side, either by being so successful that one becomes euphoric, or a few losses occur and we become fearful and hesitant. Either way once the trader is out of the zone or mindset where they are objective, they are going to find trading much harder.

Discretionary traders must always be in touch with their own psychology, they should be able to monitor themselves so that they know if they are in a mindset which will allow them to trade properly. Learning self analysis is just as, if not more important than market analysis. Just like we analyze the market for trading opportunities, we must analyze ourselves so that we know that we are fit to trade. Only when the answer is a definite YES should the (discretionary) trader proceed...

IMHO this is...
  • #4
  • Sep 19, 2011 6:07am Sep 19, 2011 6:07am
Quoting nubcake
so sick of threads with copy pasted garbage!

discretionary is a bullshit term used by those who can't clearly define certain aspects of their ruleset.

the end.
So if someone spends years watching the market and following it, they will not gain any gut feel for what is going on, and then they will be unable to benefit in any way from there experience or use discretion to apply it in any way?

whatever.......

Not all trades fit in a nice little pigeon hole...
  • #5
  • Sep 19, 2011 6:13am Sep 19, 2011 6:13am
Quoting highlander2
So if someone spends years watching the market and following it, they will not gain any gut feel for what is going on, and then they will be unable to benefit in any way from there experience or use discretion to apply it in any way?

whatever.......

Not all trades fit in a nice little pigeon hole...
yeah, whatever.

"if someone spends years blah blah gut feel blah blah discretion blah blah"... precisely what i asdflkjsdfk said! they do shit because they 'feel' they should, or to put it another way... they can't define their ruleset, despite clearly having reasons (rules) to get in and out.

.... friggin' people
Congratulations ScalaFX for coming out of the closet!
  • #6
  • Sep 19, 2011 6:16am Sep 19, 2011 6:16am
Quoting nubcake
so sick of threads with copy pasted garbage!

discretionary is a bullshit term used by those who can't clearly define certain aspects of their ruleset.

the end.
Please explain how what I wrote is 'copy pasted'.

Can someone with years of experience accurately define every single variable they use to classify the validity of a trade? I'm not referring to those variables found within their system, but those that are external. Perhaps seeing a pattern of price action that is recognized to result in a given effect. Again, this pattern is not within their system but external, a tool or memory.
  • #7
  • Sep 19, 2011 6:17am Sep 19, 2011 6:17am
Quoting nubcake
they can't define their ruleset,
Maybe they don't need to............
  • #8
  • Sep 19, 2011 6:18am Sep 19, 2011 6:18am
Ever seen a floor trader do the robot?


*mannequin
  • #9
  • Sep 19, 2011 6:18am Sep 19, 2011 6:18am
systematic trading is when you found something that has a clear statistical edge over 50 years of data with clear entry and exit rules. discretionary traders are a specimen which can give arsenal (good trading ideeas) for the systematic trader. stuff on forums goes like this
discretionary trader : hey guys i just found a strategy which i want to share. you get in at this and this and i leave the exit strategy at you're decision. systematic trader says:what?? do you mean to say that when i am in a trade i should make judgement calls? hey man there is a simpler way to do things :the system can be made into a set of rules and from the stuff i tried my best exit solution is this... the advantage of a systematic aproach is that you don't second guess yourself when you're in a trade because you know exactly what to do .
  • #10
  • Sep 19, 2011 6:22am Sep 19, 2011 6:22am
Quoting OmniTree
However, in a Mechanical system a lot less of the trend is captured as the system needs to be loose enough to reduce whip-saws while still capturing as much trend as is possible. This results in fewer PiPs captured over the course of a given trend with the benefit of higher overall consistency, as the discretion of the trader is removed from the equation.
I don't agree with that statement. How much is captured depend on the system itself, not how 'loose' the system is.......and whip saw has nothing to do with it.

It all depends on the mechanical system employed......I expect *some* suffer as you point out, but not all suffer........you can't put all mechanical systems in the same pigeon hole
Doing what you like is Freedom. Liking what you do is Happiness.
  • #11
  • Sep 19, 2011 6:24am Sep 19, 2011 6:24am
Quoting deltatrade
systematic trading is when you found something that has a clear statistical edge over 50 years of data with clear entry and exit rules. discretionary traders are a specimen which can give arsenal (good trading ideeas) for the systematic trader. stuff on forums goes like this
discretionary trader : hey guys i just found a strategy which i want to share. you get in at this and this and i leave the exit strategy at you're decision. systematic trader says:what?? do you mean to say that when i am in a trade i should make judgement calls? hey man there...
That is exactly the benefit of a systematic or mechanical system. However, are there benefits of a discretionary system to compare?

I'm not leaning one way or the other, but trying to find an answer through discussion.
  • #12
  • Sep 19, 2011 6:25am Sep 19, 2011 6:25am
Quoting nubcake
yeah, whatever.

"if someone spends years blah blah gut feel blah blah discretion blah blah"... precisely what i asdflkjsdfk said! they do shit because they 'feel' they should, or to put it another way... they can't define their ruleset, despite clearly having reasons (rules) to get in and out.

.... friggin' people
Your understanding of the market seems to be far removed from reality. The market is constantly going through different cycles, climates, liquidity changes etc etc. Trading a successful discretionary strategy is much like reading between the markets lines a lot of the time. Some things just can't be clearly defined or coded. Just too many variables to be considered that can't always be clearly measured. Thats why discretionary strategies get my vote
  • #13
  • Sep 19, 2011 6:26am Sep 19, 2011 6:26am
Quoting realjumper
I don't agree with that statement. How much is captured depend on the system itself, not how 'loose' the system is.......and whip saw has nothing to do with it.

It all depends on the mechanical system employed......I expect *some* suffer as you point out, but not all suffer........you can't put all mechanical systems in the same pigeon hole
Interesting point, thank you for pointing it out. No pun intended.

I had intended to provide a negative to mechanical systems to counter the positive.
  • #14
  • Sep 19, 2011 6:29am Sep 19, 2011 6:29am
do you think pavlov's dogs knew why they drooled each time they heard a bell? i'm sure they didn't particularly put much thought into it, so my guess is no.

it's just not that damn hard to not make mystical or magical relationships with stuff and just admit that "hell, i don't know why i do something, but i'm sure there's a reason". but that would mean people would have to stop being guru's with their secret sauce that only they can channel through mystical feelings... like a personal whisper in their ear that only they can hear from their supreme deity, NASDAQ.
Congratulations ScalaFX for coming out of the closet!
  • #15
  • Sep 19, 2011 6:35am Sep 19, 2011 6:35am
Quoting OmniTree
Interesting point, thank you for pointing it out. No pun intended.

I had intended to provide a negative to mechanical systems to counter the positive.
I'm sure there are negatives.....there are in any system, mechanical or not. But I think that each mechanical system will have it's own unique negative trait just as any discretionary system will too.
Doing what you like is Freedom. Liking what you do is Happiness.
  • #16
  • Sep 19, 2011 6:37am Sep 19, 2011 6:37am
Quoting Agro
Your understanding of the market seems to be far removed from reality. The market is constantly going through different cycles, climates, liquidity changes etc etc. Trading a successful discretionary strategy is much like reading between the markets lines a lot of the time. Some things just can't be clearly defined or coded. Just too many variables to be considered that can't always be clearly measured. Thats why discretionary strategies get my vote
bullshit. it has nothing to do with being 'codeable'. if mechanical means everything that is managed through code and discretionary is everything else, then that is a very broad definition and most people are surely discretionary by this definition since most people are too stupid to know how to count to 10, let alone write code and make their 'system' 'mechanical'. but do you think that out of all of these 'discretionary' traders there aren't plenty who have clearly defined reasons to be in or out? i think not!

using your fingers or toes to press the buy or sell button does not a discretionary trader make. there's no discretion for a trader who knows exactly why they are pressing the buy or sell button. therefore, discretionary traders are traders who don't know why they are getting in or out... it's either a 'feeling' or a george soros sore back or a message from the afterlife or a split personality commanding one to trade or whatever.
Congratulations ScalaFX for coming out of the closet!
  • #17
  • Sep 19, 2011 6:44am Sep 19, 2011 6:44am
Is a mechanical system not just a system where the discretion is done before the market opens?

In order to create a mechanical system discretion is required for all the necessary parameters. When to enter, exit, time to trade etc. It is just done beforehand.

If I then make the exact same decisions as this system but add further discretion during market hours I become a cowboy trader?

For example, I can make fluid decisions on exiting a trade before or after a mechanical take profit would be hit if the current volatility/range/behaviour shows me I should let the trade run and try for more profit or take it earlier. Initially my results were slightly worse that a set TP but are now much better and improving.

Discretionary trading does not necessarily mean by the seat of your pants let it ride gambling. My system could be coded but I much prefer to trade it. This has enabled me to use a single system and adapt it to current market conditions. This is where experience will definitely make a difference to the bottom line over time.
  • #18
  • Sep 19, 2011 6:45am Sep 19, 2011 6:45am
Quoting nubcake
using your fingers or toes to press the buy or sell button does not a discretionary trader make. there's no discretion for a trader who knows exactly why they are pressing the buy or sell button. therefore, discretionary traders are traders who don't know why they are getting in or out... it's either a 'feeling' or a george soros sore back or a message from the afterlife or a split personality commanding one to trade or whatever.
Is it not discretionary when a trade is placed based upon a tool not found within a given system? While there are traders who place trades based upon the cycles or the moon or the answers to prayers to the deity of their choice. The majority, if I may, use tools that are external to their system. The use of those tools are at, as defined by the form, the discretion of the trader. Whereas a mechanical system simply is, the rules are executed as is no questions or external tools used.
  • #19
  • Sep 19, 2011 6:54am Sep 19, 2011 6:54am
Quoting nubcake
bullshit. it has nothing to do with being 'codeable'. if mechanical means everything that is managed through code and discretionary is everything else, then that is a very broad definition and most people are surely discretionary by this definition since most people are too stupid to know how to count to 10, let alone write code and make their 'system' 'mechanical'. but do you think that out of all of these 'discretionary' traders there aren't plenty who have clearly defined reasons to be in or out? i think not!

using your fingers or toes to...
Think our definitions of mechanical and discretionary vary a bit. For me, a mechanical system is a clear set of entry and exit rules that once met, the order is triggered. Doesn't need to be a coded EA, but once all the requirements are met, then the trigger is pulled. Discretionary trading on the other hand will incorperate some loose guidelines (some looser than others) and then the trader will take the whole landscape into account and make a decision on whether its a yay or nay. They may "know exactly why they are pressing the buy or sell button" at the time, but it is not due to a specific set of rules as all conditions and mixes of different conditions can't possibly be accounted for in a set of rules and the next time the oppertunity arises a totally different course of action may be taken. Hence, the trader has shown discretion.
  • #20
  • Sep 19, 2011 6:57am Sep 19, 2011 6:57am
Quoting Frying
Is a mechanical system not just a system where the discretion is done before the market opens?
No, I don't believe so.....certainly not in my case. For me personally, I don't care what the trend is, I don't care what news is coming (except maybe NFP and the like), and pretty much I don't care about anything. My entry will be on the same terms, day in, day out......as will my target price. The SL to almost always the same, as is the target price. Once my target has been met.....then I'm done with that pair for the day. If I get stopped out......then I'm done with that pair for the day. In the unlikely even that I have to close the trade before the target is reached......then I'm done with that pair for the day.......no exceptions.


Quoting Frying
In order to create a mechanical system discretion is required for all the necessary parameters. When to enter, exit, time to trade etc. It is just done beforehand.
No...not at all. The rules of entry and exit are all set by the rules of the mechanical system.....at least they are for me. The only 2 possible areas of discretion is SL (but usually this too is set by the system) and taking an early exit if the target price is not going to be met before the per-defined 'cut-off' time.

Like I said, there are so many systems, that you just can't pigeon hole them.....they are all different.
Doing what you like is Freedom. Liking what you do is Happiness.
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