Why are System Traders Vilified by Discretionary Traders?

kut2k2 · Dec 6, 2015

globalarbtrader said:
Apart from Jim Simons. And David Shaw. And Cliff Asness. I could go on...

Come late to this thread, but heres my 2 cents.

Do you believe the past will repeat in the future? Most trades seem to operate on this assumption. All technical traders do (by technical I mean anyone who analyses prices to decide what position to have on, no matter what method they use). Your narrative for this repeatability might be 'price action', or 'risk factors', or 'premium for supplying liquidity' - it doesn't matter.

Some believe that the best way of proceeding is to stare at the chart until they see something that indicates what will happen next. Others like myself believe you are better using a completely objective rule (one which could be automated, but which doesn't have to be). The latter group are systematic traders. I personally think that the more successful people in the former group will be those that stick more closely to a system, even if they can't articulate it well enough to turn it into computer code. Tied to this is the fact that successful traders tend to have good systems for position and risk management.

This leaves the discretionary traders in this group who don't follow any kind of system, explicit or implicit. They are less likely to be profitable.

What about when the future doesn't look like the past? There is a small group of people who can actually predict the future without needing the past to repeat. In my opinion such an ability won't come from staring at a chart. If you see a pattern you haven't seen before how would you know what will happen next? The ability to predict the future comes from macroeconomic analysis, fundamental analysis, lots of work, and a strong understanding of how the international economy and finance works. I'm thinking of people like Paulson and Soros. People who can look at a completely novel situation, like an asset bubble inflated by synthetically created debt, and work through the consequences of what is likely to happen next.

These people are very rare, but yes they will be far more profitable than any system (with the obvious exception of high frequency trading).

However 99.9% of people aren't cut out to do this (and even if you have the aptitude it's hard to do it without the resources you get from working in an institution). But everyone can run a trading system - at least in theory. Not everyone can design a trading system that will, with some luck, have a chance of making some money (and most systems you can buy are overfitted, trade too often and take too much risk). Not everyone has the discipline to stick to a system (which is why automation can be helpful, if done right).

In conclusion I think true discretionary trading skill is rare. Most people who think they have it do not. Most people would be better off trading with a system, and accepting they'll never make as much as the very best discretionary guys.

GAT
More...

It's a pity we don't have a Hall of Fame for single posts because this one surely qualifies.

newwurldmn · Dec 6, 2015

globalarbtrader said:
Apart from Jim Simons. And David Shaw. And Cliff Asness. I could go on...

Come late to this thread, but heres my 2 cents.

Do you believe the past will repeat in the future? Most trades seem to operate on this assumption. All technical traders do (by technical I mean anyone who analyses prices to decide what position to have on, no matter what method they use). Your narrative for this repeatability might be 'price action', or 'risk factors', or 'premium for supplying liquidity' - it doesn't matter.

Some believe that the best way of proceeding is to stare at the chart until they see something that indicates what will happen next. Others like myself believe you are better using a completely objective rule (one which could be automated, but which doesn't have to be). The latter group are systematic traders. I personally think that the more successful people in the former group will be those that stick more closely to a system, even if they can't articulate it well enough to turn it into computer code. Tied to this is the fact that successful traders tend to have good systems for position and risk management.

This leaves the discretionary traders in this group who don't follow any kind of system, explicit or implicit. They are less likely to be profitable.

What about when the future doesn't look like the past? There is a small group of people who can actually predict the future without needing the past to repeat. In my opinion such an ability won't come from staring at a chart. If you see a pattern you haven't seen before how would you know what will happen next? The ability to predict the future comes from macroeconomic analysis, fundamental analysis, lots of work, and a strong understanding of how the international economy and finance works. I'm thinking of people like Paulson and Soros. People who can look at a completely novel situation, like an asset bubble inflated by synthetically created debt, and work through the consequences of what is likely to happen next.

These people are very rare, but yes they will be far more profitable than any system (with the obvious exception of high frequency trading).

However 99.9% of people aren't cut out to do this (and even if you have the aptitude it's hard to do it without the resources you get from working in an institution). But everyone can run a trading system - at least in theory. Not everyone can design a trading system that will, with some luck, have a chance of making some money (and most systems you can buy are overfitted, trade too often and take too much risk). Not everyone has the discipline to stick to a system (which is why automation can be helpful, if done right).

In conclusion I think true discretionary trading skill is rare. Most people who think they have it do not. Most people would be better off trading with a system, and accepting they'll never make as much as the very best discretionary guys.

GAT
More...

You distill the difference very well.

The only thing I will add is that there are several strategies/asset classes for which discretionary trades can be successful: risk arb, credit arb, and event driven all of which the fundamental decision can't be systematized.

OddTrader · Dec 6, 2015

Q Can completely discretionary traders every succeed?

http://www.elitetrader.com/et/index...ly-discretionary-traders-every-succeed.53571/

What is your trading style?

I'm a purely discretionary trader
76 vote(s)
32.5%

I have rules and apply a little intuition
115 vote(s)
49.1%

I trade my rules 100%
20 vote(s)
8.5%

I'm a systems trader
23 vote(s)
9.8%

UQ

wrbtrader · Dec 6, 2015

OddTrader said:
...

What is your trading style?

I'm a purely discretionary trader
76 vote(s)
32.5%

I have rules and apply a little intuition
115 vote(s)
49.1%

I trade my rules 100%
20 vote(s)
8.5%

I'm a systems trader
23 vote(s)
9.8%

UQ
More...

I did a poll many years back and I was a little shocked that intuition trading was +15% higher than discretionary trading.

I always thought it would be the other way around. That's a very large percentage of retail traders that are trading via gut feel (intuition). Extremely difficult to fix trading problems when they occur.

Redneck · Dec 6, 2015

OddTrader said:
Q Can completely discretionary traders every succeed?
More...

Manual traders fall into one of three classifications

Mechanical - nothing subjective (this can be view as manual trading fundamentals)

Subjective - widely aka discretionary - without firmly grasping the above.., this one is very hard to trade successfully..., this one is also what most gravitate to first

Intuitive - need to be thoroughly competent at both above..., before this one even comes into play

==============

Can one be completely discretionary (subjective)?

No

Mkt is uncertain...., completely subjective is also uncertain

Two random variables..., working in concert - with the intention of achieving consistent results (which consistent results does not in any way infer / mean / equate to 100% wins)

Will never happen..., never

The best result will only ever be the boom / bust type..., which is self perpetuating / self re-enforcing

Causing said trader to go on a quest - for another / better..., indicator / approach / methodology / signal / whatever (which won't work)

================================

Begin as a mechanical trader - learn the fundamentals - then move on.., or not - plenty of money can be made at this stage

These fundamentals - are trading 101s

Pre-define / know your A&M
Enter each predefined signal (trade as the house..., not as a gambler)
Make a trade plan for each trade - then trade the damn thing exactly
Keep all / each losing trade small (never to exceed its planned SL)
Allow all / each winning trade to make / reach its PT
We never know which trade..., is which - until after the fact - so no need to act / think / trade - like it

When one can do this in their sleep..., blindfolded..., with one hand tied behind their back - when healthy / sick / happy / pissed off/ hungry / or whatever - then..., and only then - should one contemplate moving to subjective

Successfully assimilate subjective..., we can then discuss intuitive

agree / disagree..., like it / dislike it - it is what it is

RN

Traderz · Dec 7, 2015

Redneck said:
Manual traders fall into one of three classifications

Mechanical - nothing subjective (this can be view as manual trading fundamentals)

Subjective - widely aka discretionary - without firmly grasping the above.., this one is very hard to trade successfully..., this one is also what most gravitate to first

Intuitive - need to be thoroughly competent at both above..., before this one even comes into play

==============

Can one be completely discretionary (subjective)?

No

Mkt is uncertain...., completely subjective is also uncertain

Two random variables..., working in concert - with the intention of achieving consistent results (which consistent results does not in any way infer / mean / equate to 100% wins)

Will never happen..., never

The best result will only ever be the boom / bust type..., which is self perpetuating / self re-enforcing

Causing said trader to go on a quest - for another / better..., indicator / approach / methodology / signal / whatever (which won't work)

================================

Begin as a mechanical trader - learn the fundamentals - then move on.., or not - plenty of money can be made at this stage

These fundamentals - are trading 101s

Pre-define / know your A&M
Enter each predefined signal (trade as the house..., not as a gambler)
Make a trade plan for each trade - then trade the damn thing exactly
Keep all / each losing trade small (never to exceed its planned SL)
Allow all / each winning trade to make / reach its PT
We never know which trade..., is which - until after the fact - so no need to act / think / trade - like it

When one can do this in their sleep..., blindfolded..., with one hand tied behind their back - when healthy / sick / happy / pissed off/ hungry / or whatever - then..., and only then - should one contemplate moving to subjective

Successfully assimilate subjective..., we can then discuss intuitive

agree / disagree..., like it / dislike it - it is what it is

RN
More...

What exactly do you mean by "know your A&M"?

Redneck · Dec 7, 2015

Traderz said:
What exactly do you mean by "know your A&M"?
More...

A&M - Approach / methodology

A very clear..., simple..., and concise - A to Z document - of the what..., when.., where..., how - one is going about (approaching) their trading (the "why" best be to make money"..., the "who" would be the idiot clicking the mouse)

Our approach.., tools..., signal(s)..., chart layouts..., when we trade..., we we site and observe - everything..., and anything - detailed out clearly..., concisely..., and precisely

No bullshit..., no overly complicating crap..., no nebulous fluff

One can't define it - either figure out how..., or eliminate it

================

Then we get to know it (internalize) - so when the shtf..., PA in a coma..., we get stopped "X" number of time in a row - we have a clearly defined process to follow

After that - every trade gets its own plan

Entry / entry signal
SL / PT
Way of managing

and away we go.....

In the mechanical stage..., no subjectivity is allowed - gotta get the fundamentals down stone cold first

Then subjectivity can be introduced

==========================

And if you're not sure.., examples of subjectivity:

Cut losers short.., let profits run (short of what / run to where)

BLSH / SHBL (and exactly what is hi.., or lo)

Any momentum trade (no clue how far / long it will run..., or if its going to reverse just as hard and trap you)

Anything not succinctly defined on paper - is subjective (even if it defined in one's head - we are human.., and humans are not robotic..., nor immune to life happens)

RN

Traderz · Dec 7, 2015

Redneck said:
A&M - Approach / methodology

A very clear..., simple..., and concise - A to Z document - of the what..., when.., where..., how - one is going about (approaching) their trading (the "why" best be to make money"..., the "who" would be the idiot clicking the mouse)

Our approach.., tools..., signal(s)..., chart layouts..., when we trade..., we we site and observe - everything..., and anything - detailed out clearly..., concisely..., and precisely

No bullshit..., no overly complicating crap..., no nebulous fluff

One can't define it - either figure out how..., or eliminate it

================

Then we get to know it (internalize) - so when the shtf..., PA in a coma..., we get stopped "X" number of time in a row - we have a clearly defined process to follow

After that - every trade gets its own plan

Entry / entry signal
SL / PT
Way of managing

and away we go.....

In the mechanical stage..., no subjectivity is allowed - gotta get the fundamentals down stone cold first

Then subjectivity can be introduced

==========================

And if you're not sure.., examples of subjectivity:

Cut losers short.., let profits run (short of what / run to where)

BLSH / SHBL (and exactly what is hi.., or lo)

Any momentum trade (no clue how far / long it will run..., or if its going to reverse just as hard and trap you)

Anything not succinctly defined on paper - is subjective (even if it defined in one's head - we are human.., and humans are not robotic..., nor immune to life happens)

RN
More...

Excellent, thanks for clearing that up.