Systems Trading or Discretionary Trading? Let's discuss. Will give my thoughts after receiving some responses.
Let me start by saying that I have seen people consistently make Money from all kinds of Trading Techniques right from rigid Rule based Systems to completely Random Entry. So my views are just that- my views and in no way reflect an absolute view. Trade whatever works for you
By Discretionary Trading I mean a Rule based System where the Trader still retains discretion on whether or not to take a Trade based on his current view of the Market. By System Trading I refer to Traders who have evolved entry and exit Rules based on extensive backtesting
Such Traders take almost every signal irrespective of how they feel about the Market and in so doing try to do away with the emotional trauma that comes with Trading
There is a lot of talk about the large Hedge Funds and Institutions being System Traders as it allows them to scale up but this is not really a valid comparison because their Systems are based on many many variables and require high end computing power to run and execute
Also they work on very high volumes and many of their Trades are of very short duration. So their System might have a very small Expectancy but they are able to play it out over millions of Trades. All this is beyond the scope of normal Retail Traders who work with Simple Systems
Does Backtesting really provide an edge? In my opinion it does not- at least as far as the Win Rate is concerned. Most System and Discretionary Traders work in the 35-60% Range. Both make their Money thru a higher RR Ratio- the ability to cut losses quickly and let Profits run
Where System Trading works is that it gives you objective Entries and Exits which can be coded and signals generated which can be Traded either manually or thru algos. Discretionary Traders generally tend to Trade on Patterns which are subjective to a large extent
So one can see many post mortems or analysis of Trades by experienced Discretionary Traders each arguing with their own logic whether or not a Trade should have been taken or not and if so when. System Traders don't have this problem
Personally I'm for Discretionary Trading. Years of eyeballing charts does give you an edge and a 'feel' for the Market which works out more often than not. Of course it requires better control of emotions and the ruthlessness to cut losses which in any case comes with experience
Perhaps the best way to Trade is what my friend @SubhadipNandy said during this discussion- Discretion Traded Systematically is the way to go.
The other reason I'm not really a fan of Backtesting is because as Mark Douglas said 'every moment in the Markets is unique.' History does not necessarily repeat itself in the Markets
Ok. There are certain strategies where backtesting is essential. So if I am Trading an intraday System with a 10 point SL and 20 point Target based on a few variables, it would be stupid to go ahead without extensively backtesting it
Here is Linda Raschke, one of my favourite Traders, weighing in on the subject. macro-ops.com/lessons-from-a…
