I'm just curious about what traders in Emini Futures, Grains and related futures instruments think about Mechanical Trading versus Discretionary Trading because I see a lot of posts here at EliteTrader concerning systems, backtesting, automations, etc. Hopefully, this doesn't turn into a heated debate and just provides insight into trusting ones own judgement versus letting a program do the work. Good night all..back in bed for me with a slight fever. Nihaba Ashi
Actually, I had just written a response to a similar thread...Recently, I took the time to test some of my trading ideas and ideas that I had read about for years...I tested a number of variations of "N day or N period" breakout systems...I did not use any filters or "conditions" because I did not want to skew or curve fit the results...It was a very interesting study because I found that if the period was correct(i.e. a specific threshold number of periods) that the system had a high positive expectancy almost irrelavant of how I "tweaked" the money/trade management parameters...The higher I went with the periodicity, the higher the drawdowns and the lower the winning percentage(exactly as one would anticipate)... Although I do not want to get too specific about the exact combinations I used, I did have enough data(3 years) with enough combinations of money management combinations to conclude that several specific time frames will produce very solid returns... That being said, when I tested any number of very short term trading systems, none of them had positive expectancy...But, again that is to be expected...For a very short time frame, your profits come from being able to discern the environment...Obviously applying a trend following system to a choppy sideways markets and/or a support/resistance system to a trending market would just blow out the account...So, it would appear that anyone trading on a very short time frame with a system would need to adjust the system to the environment and the volatility... Either way, I am not a mechanical trader...But I use support/resistance, pivots and time of day type of analysis to get into the trades...Mainly, it is the management of the losers, winners and scratch trades that really determines the day to day profitability...The environment is so quick, that I feel that traders who have good trading instincts thrive on the shorter time frames...Traders who are too mechanical tend to "lag" the actual price action and always off balance... I believe that systems have a place in the markets, but typically not with the really underfunded traders...They require a definite mental and emotional detachment from trading results over a small sample period...Few traders with smaller accounts can accept these standards...The reality is that most traders are stuck between the two, which is not altogether bad...Many will use some features of a system and some discretion...The key, I believe, is to just understand and exploit the relative advantages of each... just one opinion...
Backtesting is extremely useful to help you determine what does NOT work. It also helps you condition your thought processes in a structured methodical manner, and a much needed part of doing the work you need to do to learn your markets. And also I don't believe that it will provide you with a 'money machine' -- contrary to what the system peddler's want you to believe. But the biggest benefit from backtesting is that it helps you to truly understand the randomness of it all, and why you need to think in probabilities, to 'let go' of the trade, and to learn to control what you can control -- which is yourself. 'Cause once the markets moving on a short term basis the human mind is the one machine that can 'clean up' -- if you let it.
I so agree with both comments. Without very deep pockets it is really good to have a combination of mechanical and discretion. It goes against system traders wisdom (always trade the system without any exception, without any delay). But the thing is when your basis for trading is mechanical or systematic, you have more chance to make it than otherwise. Discretion improves the equity curve over time (with experience that is). That is my experience anyway. With the systematic basis, your brain can concentrate on other things and learns the patterns of when your system does not work (the system is not capable of that obviously). backtesting is something different. it can be used to test an idea. it is not necessarly to trade this idea. in other words when you backtest, you don't always try to build a mechanical system. Anyway, indeed, it will tell you what does not work and that's as important as telling you if it does. (more important in fact, since you want to protect your capital first). Granted, people backtesting have in mind to build a mechanical system. I guess. Nowadays I do backtest without this goal, just to verify hypothesis about the markets. trading is indeed about probabilities. that's why nothing works all the time. not even a discretionnary trader (!). You can make money either way and make a living. it can be purely mechanical and automated, or discretion with a strong method (or few methods used depending on context). Over time, it seems people got educated about the difference on ET. The threads are not battlefields anymore (so far ). I built many systems.. or should I say scratched many systems. and what works is usually simple and directionless, market neutral, arb. that's rarely what you find out there (which makes sense anyway). tntneo
I agree to the extent that you need to manage a mechanical system when they are not performing at par. I disagree, the popular text books may say that, but the successful black box traders I know realize that systems can cease working, and then start working again for a multitude of reasons; and the best way to trade them is cutting the size when they are under performing and raising the size as they return to the norm. I agree.
metoxx then we fully agree. my point regarding system traders wisdom is exactly what you see : it's BS ! indeed you either reduce size, activate another system or just pull the plug.. I may do any of the 3 or combinations.
We trade multiple systems; decrease or increase size based on performance, cease trading a system when the game goes away, but keep testing a dead system; you never know when the stars line up and it starts working again.
metooxx, we do the same thing with the diversification. very interesting to see that also others do that. alain
In a general description, what are some of the strategies some of you use with the Black Box style systems? On average, what are you daily/monthly/yearly returns?