IMO, the secret sauce for my discretionary trading is risk management. When you are 100% mechanical, your risk is limited by whatever you have programmed in. But when discretionary, failure to manage risk is where the big losses can come from. However, in discretionary trading the profits can also be bigger if risk is well-contained because you don't have arbitrary profit targets and can generally stay in a winner longer. It is a trade-off. And it also depends on one's definition of "discretionary". Some people use 100% mechanical risk management (like bracket orders) but they use instinct and pattern/market condition recognition to enter the trades. Some traders like me only limit the risk with a firm stop, but not the target. Others limit neither and simply stay long if if they think or see the market going up, with no stops or targets until they see a reversal or peak. These folks claim to use "mental stops". As you can see, there are many flavors and levels of "discretion"
Sounds like you want to take discretionary trading and make it system trading. Discretionary trading lets emotion play a part in your decision making. You have to rationalize why you are taking or not taking a particular trade. Risk management is easier with system trading. You wonât blow up if you follow your rules. With discretionary trading you are actually changing the rules depending on how you feel at the time.
Well, I would argue that in vast majority of cases these many flavors and levels of discretion can be programmed in or lets say compiled into a set of rules. So trading then becomes largely mechanical. for example Richard Dennis famous turtle system had a 'smart rule' to skip the next trade if the previous trade produced a large profit etc. Thanks.
This is the key quote in this thread. Mechanical systems ret and put numbers against everything tp litoralize what is or can occur. The problem for the computer is, and what the discretionary trader solves is, that hwo you enter and exit is context dependent. When I teach students to trade, they start of with a mechanical trading plan but as they progress in trade recognition they graduate to trading plans that take into the dynamic nature of the market and trade with stops and targets that are dependent on context and trade location. While I also trade with an automated expert system to cover more markets for linger hours, I can always trade with a higher win rate and profitability when I am trading manually as a discretionary trader.
right, I would like further clarification/insight into the secert sauce that makes discretionary trading different from mechanical trading. and to be able to use the sauce time and time again to make better decisions if possible. I have looked into emotions and feelings quite a bit, I find them deadly in trading. I am not saying I am right, but I believe if I trade in a discretionary manner, i am practising self delusion and seeing the trade through rose colored glasses. Thanks.
First of all, you need to define "discretionary trading". I have a very simple definition...if it is not automated or mechanical trading...it's discretionary trading. With that said, discretionary trading can be subjective (no rules) or objective (rule base). However, don't get caught up in the debate in that if it's rule base...it can be converted into a mechanical trading system. The fact is this, some discretionary traders using an objective (rule base) method do not want to automate or mechanical system for whatever reasons. Successful discretionary traders have excellent control with the discipline aspect whereas losing discretionary traders don't have control of the disipline aspect. That's one of the advantages of automated or mechanical trading...the emotions are removed and there's not a discipline variable to worry about. As for market experience, I've differentiated market experience and trade methods. Simply, if you're talking about entry to exit signals...I won't put that under market experience. I consider market experience very subjective, very adaptable such as don't trade the day after not getting a good night of sleep due too partying. Thus, market experience for a discretionary trader can (not always) control an objective rule base method...determining when to use the objective method, when not to use the objective method and when to trade on gut feeling only (subjectivity only). A discretionary trader without market experience...needs to go very slow in the beginning until he/she gains the experience that's needed to manage discretionary trading regardless if the entry/exit signals are subjective or objective. Hopefully this doesn't turn into a debate about discretionary trading versus mechanical trading. Trade via whatever style you want. Mark
I'm interested by the initial premise of your thread. Some people have said things like "instinct" play a role in discretionary trading. I believe that qualifies as: "decisions being made based on heuristics that are not necessarily consciously known to the trader." It also implies such heuristics cannot necessarily be distilled into rule based form suitable for mechanical trading. In the computer world, an interesting parallel is research that has been undertaken to extract knowledge and heuristics from trained artificial neural networks that are in many respects black-boxes like human brains. If you manage to develop an artificial neural network with predictive powers it's often not possible to know the reason why it is successful or to extract the decision making logic out of the neural net to understand how it works. This is perhaps similar to a successful discretionary trader who can't articulate with completeness their decision making logic. ---------------------------- Completely OT but have you ever been diagnosed with mild dsylexic dysgraphia or something else? You have interesting ways of spelling 'secret' throughout this thread.
Bearmountain: You briefly touched on a possible solution for you. We all see the conflicts that you have and your desire to work to organize your considerations for trading. Thanks for providing a reference on your orientation. Most people come to forks in the road, decide on the fork and close the door to the rejected alternatives. Rarely do people look at the market and lay out all the pieces. This would be like doing a picture puzzle on a card table. I won't offer an explanation about how to put a picture puzzle together but most people would group the pieces according to their zone of aplication to facilitate putting them together. Doing a puzzle upside down is more focussed although more challenging with respect to the mind. Consider the problem you have designed as a system. Systems have three cpmponents: structure, the process within the structure and third, the results that output from the structure and the process. So far you recognize very few of the pieces that can be fit together. You lack a structure and a process. How many parts are there in the structure? What is the breakdown of the process parts? Your intial post was like a blueprint that could have been made into a picture puzzle. The pieces of the blueprint or picture puzzle correspond to the pieces of a system. Lets say you are a scientist or a historian. Either way you could synthesize the science of the financial industry or the hisotry of the financial industry. Either way, you could get a thoroughly develpoed optimum system. I was a scientist so I build a system from the pieces. I knew it was complete when it was noisefree and had no anomalies. It could be used on all markets on all fractals as long as the market exhibited liquidity. I have gone back over history as well. I looked at the pieces in terms of their appearance on a time line and their integration into the system of the markets. In 1957 when I started their were about 150 named pieces in the language of the markets (vis a vis V, P and trend monitoring and analysis); in retrospect, I found I adopted about 72 of these in 1957. Trading a system involves a process and the result is a taking of the market's offer. The process is conducted within a structure. In terms of describing the structure, it has about 6 inputs and they are expanded to about 70 degrees of freedom so that the process can be throughput to extract the market's offer. All can see the market's offer. It is huge in any terms a person wants to use to describe it. It is available to all. Market principles provide the big chunks of structure and process and each is formed of pieces that you defined in your first post. A person can eaither analyze a system or synthesize a sysytem by assembling it parts. Either way the secret sauce is apparent. It is plain to see that it is the glue that allows the pieces to fit together in a context of integral strength. For me as a scientist, I depended upon the principles used in science to enable me to conduct my work. I had to cast aside induction, probability, statistics and any forecasting stuff. Historically none of those things were in the picture at the beginning anyway. I turned to an orientation very simmilar to what made conputers possible. Carnap and Keynes. Carnap for logic and Keynes for paradigm theory. This was an deduction orientation. You didn't. You happened to be oriented to induction and its companion discretion. Now, like acurary before you, you have the potential to switch to a scientific approach based on using a methodology instead. In trading, it is possible to use a science oriented routine while trading. I use monitorin, analysis, decision making and timely action. I use it many many times a day and often on each bar I see forming. this loop has closure built into it. The probabilisitic induction oriented traders usually use a form of OODA for trading. It is betting and finding out if your bet was correct or incorrect. John Boyd invented it for training fighter pilots whose lives weree in his hands. In my case I have heard from active fighter pilots who prefer MADA a deductive process. You may either take a system apart and look at all it components and how they fit into their heirarchy. You may simply put all the pieces out on the card table and pick each one up and examine it and then fit it in its place. Learning is better done by beginning with a foundation and adding the building blocks to get the whole. Trading is better done with an excellent system where the precision is attained by automatically going from the general context to the specific micro context. You have reached to point of being an observer who may be deciding how to learn to learn about becoming a systemmic trader. What. How. Why. Where. When. Each Lego put into the system has these five aspects. Six data streams feed the container the trader uses. In 1957, the container was called a human brain. Today, the brain is blocked seriously by the operation of an array of CRT's fed by group of PC's. Five decisions are possible; in order of frequency for the scientist's mind they are: HOLD, REVERSE, Wait; enter and exit. The system is built and has no noise nor anomalies. RTH's begin with an entry. Holding is the most commone decision from MADA. At various times a day, a reversal is done to take a segment of profits and begin another segment of profits. The day ends with an exit. At some times the market may lose its liquidity. Then sidelining occurs and waiting is the modus. Turning 6 degrees of freedom into 70 degrees of freedom affords the trader the opportunity ot steer and focus on what is important in a given time series. Trend monitoring and analysis began in 1790 with the following truism: cut losses and let profits run. Improving upon this to do extraction of the market's offer took some time for history to unfold. In 1957, as I remember it mainframes still only had 4 instructions. and entering data was usually done with punched cards. Attached is a surprise for you. Imagine a person looking at a screen. He knows a vocabulary and is an expert. He is going to do 20 to 40 trades a day with 500 contracts of ES. His foundation is attached. He looks at 81 bars in a day. See if you can see the following order of events using completed red bar 14 and forming bar 15: PRV is less on YM and ES; SYM R/R; FBP R/R; IBGS; FBP R/B; Hitch R/B; Stitch R/B. What if you had a context of three nested fractals? Suppose the three were (from slowest to fastest): pt 2 to pt 3; pt 1 to pt2 and pt 3 to ftt at the beginning of bar 15. At the beginning of bar 15, you know your next four trades form this context and from the logging of the formation of bar 15. You see contracts on T&S of 50's 100's and on down. A member here, SKO, keeps asking about the window of opportunity for doing the reversal. This is one. You see The wall on the DOM. Above you see it coming, hit and bounced off of. Your S/S gave you new bars frequently during this time as well. the were running 2 to 3 minutes ahead of the turn as was the YM compared to the ES.