Discretionary trading takes a back seat

I am suspending (on a temporary basis) my discretionary trading. It doesn’t take much to gather that I’m not making a lot of money doing it, otherwise I wouldn’t be suspending it.

For the record, I’m not suspending discretionary trading because I blew out an account. But I did see a 20% return dwindle to about 5% for the year. Still profitable, but that’s a hell of a lot of work for 5%.

Discretionary trading is an art form. There are some wildly successful discretionary traders throughout history and no doubt among the living today. In fact, you may be part of this elite group. I’m not. At least not now or in the foreseeable future. So as a result, I hereby announce myself as mostly a system trader. I’ll throw a discretionary trade out there every now and then, but they will be small trades.

My pursuit of system trading will include the following liquid, leveraged trading vehicles: options, futures and currency pairs. They will be strategies that have defined entries, exits, stop-losses and money management or position sizing. There will be a logic behind each system that seeks to take advantage of market behavior. These systems will not express an opinion, as must be the case with discretionary trades, about near-term market direction or lack of direction. Instead, they will express a sort of meta-opinion on how markets work and what patterns they display. The only claim these systems have is positive expectancy over a statistically valid series of trades. In other words, there is no expectation that the next trade will be a loser or a winner, just that after 100 trades, the equity curve will rise.

Discretionary trades are different from system trades in that they do have the expectation that the next trade will be a winner. If it’s not, there are various ways of dealing with it on a psychological level, but overall it’s a disappointment.

Discretionary trades are quite a bit more exciting that systems trades and require the mastery of a much wider range of skills. System trades require statistical research and testing and are relatively boring, unless you consider a rising equity curve exciting.

My research into systems trading is going into three main areas. First on the agenda is Trend Following Breakouts. This is easy to program and backtest because triggers for entry and exit are normally some technical indicator whose mathematical equivalent is simple to code.

Second on the list is Market-Neutral Option Spreads. This includes your plain vanilla Iron Condors and the like, but there are two ways to put them on. First, you can use a rage of criteria such as 28-44 days out and decide if you should even put one on this month. This is discretionary. A system-based approach will always put the trade on month in and out, and at the time with the same risk parameters. That is the only way to backtest, optimize and walk-forward an approach.

Third on my list is a non-reversion Futures Pairs strategy. This one is a bit more esoteric and its triggering mechanism is not easily defined. It sells the dog and rides the pony, and has no expectation that there will be a reversion to the mean.

So basically I have two trend-following concepts and one mean-reversion concept on the board.

More to follow.


One Response to “Discretionary trading takes a back seat”

  1. Jared Says:

    Check out these guys


    I think its what your looking for.

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