Mechanical or Intuitive

Hi members.

Deep respect for the great postings here. Thank to you all.

But let me ask one question:

I wanna trade for a living. I am in the learning phase now.

Wat's the right or the better way in your opinion?

On one side:
I've known hundreds of professional traders throughout my career. I don't want to disappoint you, but I know of only two who where able to make a steady living for themselves with a mechanical system.
- Linda Raschke

And Mark Douglas is writing in Trading in the Zone, on page 90 about a state of mind in complete harmoney. The example with the foock of birds or a shool of fish how can change direction simultaneously.

ON THE OTHER SIDE:

I her many traders saying the the only way is to develop a mechanical trading system and follow the ruls:

Or Mark Douglas on Page 173:

"The Mechanical Stage

The mechanical stage of trading is specifically designed to build the kind of trading skills (trust, confidence, and thinking in probabilities) that will virtually compel you to creat consistent results. I define consistent results as a steadily rising equity curve with only minor draw downs that are the natural consequence of edges that didn't work."


SO WHAT IS THE BETTER WAY?

Develop a system based on 0 and 1 or IF, THEN, ELSE or listen to my heart - and learn to do this right.


Thanks for all your advice

Greetings from Austria


Daniela

 

Whatever method you use, make sure you enforce your stop loss. The method is less important than how you control your losses.

 

Trade off your "gut feels". If you've sat in front of a computer screen every hour of every trading day for more than 2 dozen months, you'll just get these gut feels. For me, they are almost always correct. When I have a gut feel on something, I take a double or tripple position. I trade almost totally off gut feels based on my great new pattern system. I recommend that you learn some system to trade, and then make your own decisions based on your gut once you've become successful with that pattern.

 

I prefer a more mechanical approach, because when I trade without that guidance, the emotional aspect overwhelms my decisions and I consistently have poor performance.

 

Good topic Dani,

Dani I know at least for me its not one or the other. When I learned to trade with my left and right brain together thats when I turned the corner and became a consistent winner.

IMO intuition is not innate, I don't believe people are just born with a sense of whether the market is going to go up or down (and even if they were they still may not ever turn the corner). Inuition is something that is acquired thru experience, knowledge, and a whole lot of sweat. Anybody who comes into this game and cleans up for a short period of time trading his gut, without prior experience or knowledge of the markets just got plain lucky.............

My risk management, position sizing, and set-ups are all mechanical in nature, but the decision to pull the trigger on a set-up is discretionary. That is where the art, the intuition, The Tao comes in......

I have more to say on the subject so I wll post the rest during the doldrums...

PEACE and good trading,
COMMISSO

 

I believe a mechanical approach is a good starting point for new traders to experience the market and learn about proper risk management. Strict rules, if followed properly, will prevent traders from making many easy mistakes.

As one gains more experience and knowledge, certain traders will actually internalize the mechanical process. In effect developing a subconsicous trading indicator. They may not be able to outwardly express this and they may not even be actively aware of it, but when the right trade setup appears, they will know it by the "gut feeling".

Htrader

 

I think, it's not a question of which way is better, but which "system" fit's your personality and needs.

I found out for myself, it's almost impossible for very emotional people, to follow mechanical trading systems rigerously day in and day out. Even when they have the strong desire to do so, because they know about their emotional "weaknesses".

I call this "the second guessing" syndrome. When the rational tradingsystem ( just a byte btw ) tells you to take a signal, you start second guessing it or you start to search for confirmation of this signal by applying other, different indicators.You'll end up with contradicting information and you'll not be able to pull the trigger.

Take a look at MetaStock for instance. You get this great software with about 130 indicators to choose from. In addition, you can create numerous own indicators and of course thousands of cusomized trading-systems.
Great for the analytical brain, but a desaster for the one who's an emotional, or say "discretionary" trader but doesn't know it yet.

So what I do is, I don't use the systems at all, but only the explorer functions to find some particular setups among the thousand stocks in my database. Even hafter having found a handful of promising stocks, I wouldn't apply any trading system on them. I look only for possible support $ resistance and the rest is up to how the markets behave, and of course, money/ Risk managment.

After all, you can apply as many indicators as you want - since you apply them always to the same set of limited data ( open, high, low, close, volume ) there are only so many important conclusions ( if any ) you can draw from that, no matter what kind of sophisticated algorithm you throw on them.

You can make a test for yourself easily with Omnitrader from Nirvana. This Software uses 120 indicators and throws them on every number of stocks you put in your watchlist.
It backtests ( even forwardtests if you like ) all these systems, gives them weightings and a final advisor rating makes sure, that only well working indicators are used for a tradingsystem. BTW- the systems are developped for each stock differently according to it's "personality".

You'll get stunning results and triple digit profits ( on paper ) for so many stocks, you can't even choose which one to jump onto for the next trade.

Interestingly, after updating your data the next day and running a backtest again, OT isn't able to find the same profitable system again !It might find even better ones, or none or worse ones.
Because the new data has changed the value of all indicators and so the signals as of yesterday are just that - from yesterday. Not anymore valid.

OT has realized this problem a couple of years ago and since then, the sell OT as "prospecting tool" rather than an automated tradingsystem ( as originally developped ). However, since most tradingsystem are made of the same "ingredients" , some trend-following indicators, some oscillators, you get a good idea about how "valuable" mechanical systems are.

As a newbie, one is often fascinated by those quiggly indicator lines, showing exactly the points when to buy and when to sell - unfortunately only in hindsight - on historical data.

When it comes to realtime action, your Stochastic or RSI indicator doesn't show in advance how long the oversold condition will last and how deep it will go.
There's no reason, why a brief recovery about the 20 level on stochastics should not result in a quick turnaround, only to fall further again minutes later. Let alone the numerous wiggles of trend-following systems in sideways markets.

Most mechanical systems / indicators have a time lag, so they are still subject to interpretation when it comes to decision taking.
To interpret them correct ( if this is ever possible ) it needs plenty of experience.

Funny thing is, the more experienced you get in working with indicators andtradingsystems, while monitoring the markets, the less you will rely on them ( the indicators & systems ).

Your experience will be, that even the best systems are wrong 50% of the time on the long run.
In the rare event, that you'll come across a system thats better than 50% longterm, it's probably not tradeable because of the huge drawdowns or other problems.

The biggest problem to overcome with mechanical systems and indicators is, that they may contradict each other when applied to different time frames.
Simple example :
The weekly MACD is down, the daily up, the 60 minute down again and the 15 minute shows a buy -signal, price is actually trending sideways, but volume has increased- at least for the last 3 minutes - now make your decisison.

Anyhow, the more experience you get in the markets, the more discretionary decisions you'll probably take.

As already mentioned here, money-managment, position sizing are more important than anything else.

regards & good luck ( sorry for the long post )

 

Your choice of trading approach largely depends on what works best for you. For both discretionary and systematic approaches you will have to create an approach/system you're comfortable with and one that has good expectancy given your risk levels.

Personally, I have found I do better with a systematic approach. I don't have problems with second guessing my systems, since I wrote the systems myself and understand how and why they work. Systematic trading is definitely not as "exciting" as trading the overnight moves on NASDAQ, but since I'm in this to make money ....

 

For a good mechanical swing trading methodology, check out http://www.mrswing.com. (a free site). Mechanical swingtrading allows you to diversify your portfolio and take bigger overall positions than day trading allows. You can also have a life apart from computer monitors. But trading with your gut works if you invest the time (lots). Your brain can figure patterns out if you inundate it constantly with what your trying to predict. Dave D.

 

Candletrader: “Whatever method you use, make sure you enforce your stop loss.”

Primo!

Htrader: Go back and read his post again. My thoughts exactly.

Privateer: “The biggest problem to overcome with mechanical systems and indicators is, that they may contradict each other when applied to different time frames.”

Hell, I have this problem with or without using a system. I rarely have everything line up. I can almost always find a reason to not take a trade.

Vikana: “I don't have problems with second guessing my systems, since I wrote the systems myself and understand how and why they work.”

Great comment. I believe it is extremely important that you are intimately familiar with the logic behind your system and it’s hypothetical performance.

Commisso: “Anybody who comes into this game and cleans up for a short period of time trading his gut, without prior experience or knowledge of the markets just got plain lucky.”

Gotta go with Commisso on this one.

Ddefina: “You can also have a life apart from computer monitors.”

Whaaat! Does such a thing exist?

Even for a newer "discretionary" trader it is imperative that you define your approach as objectively as possible. Build scenarios. Write them down and account for all the trade entry and exit related situations you think you might encounter and your responses. Define, define, define, and when you’re done, define some more.

Over time, you will be able to accurately evaluate your plan now that you can see what is working and what is not. Your ability to create a workable plan will grow, as well, now that you have had contextual experiences to draw upon. As your method matures you may find that choosing between A, B, or C is not as suitable as assigning weight to different indicators or inputs depending on their severity or lack thereof. If this is the case, using “discretion” or “your gut” may prove to be just the medicine you need now that you have the experience to more correctly evaluate the environment.

Almost everything I do is automated. I have specific rules for entry and exits dependent on different conditions. These conditions are derived from assigning weight to different inputs from indicators that monitor the market environment. My "discretion" is simply a synthesis of the inputs of the available micro “indicators” I have at my disposal. An “indicator” can be any piece of information I deem relevant to the trade at hand. I then filter all of that info through a macro “indicator”, such as my determination of the daily bias, for instance.

Every trader ultimately develops a “system” that they work religiously until revision is necessary whether they are consciously aware of it or not. The labels help us understand where another trader may be focusing the majority of his attention but they can also falsely alienate us, as well.