OK, I have an ATS that back-tests pretty well. The returns are definitely worth the effort it took to develop the system. BUT, I've noticed returns can be improved by a significant margin if certain trades could have been avoided, or certain losers were cut before they got really bad. This raises the question: should you override your system (for example reject certain signals or get out of losers before the system) or is the use of discretion a road to ruin?
If you have discretionary trading ability then it makes sense to use that. Dr. Steenbarger once told me that he had seen a "disproportionate number purely system/mechanical traders" bust out. I come from a background where I have very strong discretionary trading skills and, also, I've managed a fully mechanical trading systems for about 2 years. This process of actually running the trades gave me experience I could not get from any amount of backtesting. While I don't want to give away my best ideas, there are indeed times when using discretion will prove valuable and simple. It is up to you to determine when that is more then likely the case. In my experience, it is hard to beat the raw return of a strong system. However, it is usually easier to improve the risk/adjusted return. If you are like me then when you really start trading your system you'll think of a hundred cases that you didn't think of when backtesting. Of course, you can test and improve your system incrementally. But, when you are in a trade then you'll need to call the shot. It is really a lie that you can avoid discretion, anyway. There is no avoiding your discretion. Simply choosing to trade your system is an act that was not programmed in. Once your accept and realize there is no way to avoid your own subjective input then you can focus on what is really important: using your discretion most effectively to meet your goals.
never override. find out where "returns can be improved by a significant margin" and add that to your system
+1. read up on the turtles and other trend followers that are 100% pure systematic. some of them used discretion and missed out on the one or two big moves that would have made their year.
Best comment so far simply because its giving you a well documented story about very successful traders. Read this book: "Way of the Turtle" from Curtis Faith.
I've had success overall in the discretionary trading I've done so perhaps there is an edge there. I've read a lot about trend following , which is what the turtles do AFAIK. I've done my own studies on trend following with stocks and according to my back tests, if you took every signal since mid 2007 you would be at break-even at best. It seems trend following stocks would take even more discretion than other strategies.
ITD; Cutting losers, according to a plan should help. Working 12 hours a day, 6 days a week, 72 hours a week; for 7 .2years may help much more.Also notice even amoung pro money managers , how much more common great months are ; compared to great years or decades.
Actually TF does work on stocks and requires no discretion. Click on the pdf file on the website below. I didn't attach the actual file b/c I know a lot of us are suspicious of attached files. Happy reading. BTW related to the below study they didn't apply the study to shorting for a few reasons (see pdf) but I would be profitable. Not trying to argue just providing quantitative evidence (great job Blackstar in doing the work). http://www.turtletrader.com/blackstar-funds.html