Trading WITH versus WITHOUT a system

Discussion in 'Strategy Development' started by Georgii, Apr 12, 2009.

  1. Georgii


    Hello all,

    I am new to trading, and am trying to learn as much as I can. I've been reading a few books (like Day Trading for Dummies), but I still can't get one thing straight.

    So let's say, I'm going to start trading. Never done it before, so I'm going to be on a demo account.

    Do I start by creating a system?

    Doesn't a system require the formulation of a hypothesis, i.e. "Every time there is an MACD cross, and the Stochastic is over 80, and there is a hammer, there most likely will be an uptrend, and every time I see this combination I will place a trade, unless there is a news report"?

    How does a trader begin coming up with such a hypothesis? Gazing at historical charts, throwing all various technical indicators on it and noticing patterns?

    I hear a lot about systems, discretionary versus automated (you decide versus it decides for you). Does ever trader have a strict "system" which they have rigorously backtested? Or is this simply one way of trading?

    Thank you for any and all advice!
  2. Georgii



    So there's one group of traders who has a defined system, we'll call them Group A.

    The A types say "MACD crosses, hammer, stochastics are upwards of 80%, no news, let's take it, there's a 65% chance this will work".

    Then there is a group B who doesn't have a system per sey. They just know what security they're trading.

    The B type says "Hmmm, what do we have here? Hammer. Okay, what is the stochastic saying? 80%. Okay, that is a promising sign. What about the MACD? Not crossing. Hmm. What about the bolinger bands? Crossed the top of the band, so looks like there's something to think about here. Any news releases? None. Okay, no unexpected moves. Should I take it? Where are we in the 45 minute chart? Okay, looks like it's heading towards the top of a range, might be a bit risky for a buy...."

    Is this accurate?

    Thank you for all advice, as always...
  3. If you want to become professional trader then I'd strongly suggest you study Van Tharp's materials, perhaps start with his Peak Performance Course it will totally change your perspective on trading.

    You can read some articles for free here

    To find out answers about discretionary versus system trading etc, just do some research, it would be beyond the scope of a short reply on a forum.

    For a technical analysis you can try John Murphy's "Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading Methods and Applications"
  4. Georgii


    Thank you for all the links.

    I just want to get the semantics correct here...

    A system trader formulates a hypothesis on what is likely to be a trend in a given market. S/he looks for certain indicators that when put together, will usually predict/confirm that a trend is taking place.

    The system trader will look for these indicators, and when s/he sees them, they jump in and take the trade knowing that statistically they are likely to win more than 50% of the time (and they manage their money so that they can't get killed because of a losing streak). They have extensively backtested the system and have demo traded it, so they can fall back on a statistical success average.

    They always follow their entry and exit rules, because if they don't, they get creamed.

    Some system traders operate like a robot, always entering a trade, others might weigh a few fundamental factors before deciding to pull the trigger.

    The discretionary trader, by contrast, doesn't follow a concrete system. They check a variety of indicators, and based on what those indicators are telling them, they make a decision whether to pull the trigger or not. They don't always look at the same indicators. They are more of a "wing it" type of trader, they don't have concrete rules and they go by a combination of indicators and gut.

    Is this accurate?

    Thanks again...
  5. This is spot on, can't be said any better.
  6. Trading without a system is random gambling.

    "Discretionary" traders are using a subconscious system that they cannot quantify. Their brain is performing hundreds or thousands of calculations by looking at price and arriving at a decision of "based on what is happening, should I buy or sell?" It's exactly the same as a mechanical system, they just can't quantify it. But inside their heads it all boils down to a red light/green light system.

    System traders have been able to quantify what they want to do.

    But yeah, all the "MACD/stoch/whatever" indicator systems will end up losing you money in the long run.
  7. Georgii


    Okay, so it seems that the discretionary traders don't adhere to a solid rule book, they simply use various indicators and then make a call based on what they think those indicators are telling them.

    I haven't placed any trades yet, I haven't even started a demo account. I like the idea of the discretionary trader, I have a creative personality so I'm inclined to believe that might be the better method for me.

    I gather system traders start by observing charts, coming up with a hypothesis, and then testing that hypothesis until they feel it proves them correct.

    How would a discretionary trader proceed with coming up with a plan, by contrast?

    Any insight is appreciated!
  8. Dustin


    You are asking good questions, but getting mostly bad answers. Unfortunately ET is mostly the blind leading the blind. The path you are headed down right now has ruined many new traders. Usually I don't respond to these posts but I'm bored so here goes.

    -Indicators are to be used as a guide, not a strategy. They are also much more effective on indexes than individual stocks. They are only useful due to crowd psychology, so you need a big crowd. Many new guys fall into the trap of indicator based strategies and don't survive the learning curve (because they don't learn anything about actual trading).

    -You cannot hypothesize a strategy without understanding how stocks move, how to execute properly, and where the profits can be found consistently. The ONLY way to learn these is practice. Ideally if you have the bankroll, practice with small size in a real account. No backtesting, No paper trading. You don't learn to trade with those.

    -"OK I will practice with small size but what do I trade?" I'm a big believer in trading volatility. This means using scanners to find what's moving today. Without volume and volatility you will have a tough time, so find it and trade it. You will learn from every losing trade. There are only so many mistakes you can make in trading, and once you learn not to make them you will turn profitable.

    It took me 1.5 years of full time trading to turn profitable. If I had the above advice it would have shortened that significantly.
  9. You need to spend like 2+ years watching the market for 6.5 hours a day, open to close, and another 5-6 hours a day after that (plus maybe 10+ hours on weekends) reading books, reading ET (seriously there is some good stuff here), running up and down rabbit holes, doing replays, and all that good stuff.

    Far as I know, unless you have a mentor, the only way to become profitable is to test out ideas, almost at random, until you find something that works. If you had a mentor, you could probably become profitable in a matter of months.

    The Anek's Holy Grail thread is a good place to start...
  10. Brother,

    with that type of impression you're dead in the water. BEFORE you start.

    MACD, Stochastics? Please.

    Three successful traders once gave me priceless advice & it changed my life.

    Buy at support. Sell at resistance.

    If you lose your money looking at moving averages, MACD, stochastics, fibo, elliot or Jim Cramer I won't feel sorry for you one bit.

    Good luck. Play hard & SMART. :)
    #10     Apr 12, 2009