Discretionary, Systematic, Mechanical: which are you?

[tech/a]

97% of traders fail.
Very few can make a consistant profit year in year out.
Many aspire to be full time traders (god knows why!).

Most anyone can turn a profit on a trade at sometime.

Few really UNDERSTAND what it is that will determine
wether they are profitable or not.

Most look for the magic bullet in Technical Analysis/Fundamental analysis.
Broker advise etc.

While these are tools they are not "THE" reason youll trade profitably.

Thought Id feel the group out before I continued.
Took me 7 yrs to UNDERSTAND
8 to trade profitably and 11 to do it year in year out.

So how do you trade/invest.
What are the secrets to success as you see them/or implemented them.


There are many on forums who profess success and cannot/will not prove it.
Theory /hypothosis is fine but actually doing it is better.
The former is fine for discussion the latter better for credibility.

My Trading/Investment results are published on the web and have been for the last 3 yrs and updated weekly.
I mention this only as confirmation that I have like you travelled the full gambit of the "education" merry go round to FINALLY discover the real way to success was/is far simpler than Id ever imagined.

http://www.reefcap.com/ubb/Forum8/HTML/000390.html

tech

[wayneL]

>>(god knows why!).<<

Epicurus (sorry to harp on about ancient philosophers guys) thought there wre three ingredients for happiness.

1/ Friends
2/ Freedom (including financial)
3/ Self examined life.

Trading for me, has made these three ingredients more plentiful. So not only God knows why. A few of us who do this for a living know why as well.

As for the the crux of your post. I don't think it is really important how you trade, whether meckanical or discretionary.

Most "discretionary" traders, the successful ones anyway, would be looking for particular setups that could not be coded mechanically, bur for all intents and purposes their system would be 90% mechanical.

On the other hand "most" mechanical sytems still have an element in discretion...e.g. NOT taking particular signals on stocks that the trader knows won't suit his system.

This is true also for your techtrader system. I recall somewhere inyour threads at reefcap where you decided not to take certain signals as trades...and bloody fair enough too.

If I used techtrader, I would certainly eyeball the chart first...discretion???

Tech, for each trader the journey is different. For you it is a mechanical system and I congratulate you on its success. It is a great model for probably the majority of traders to follow...particularly those with a separate main income stream, such as yourself.

It would not suit me. (and that is not a critisism)

I need to write a check to myself each and every month from my trading business to myself, because it is my only business. This is only feasible from a short term "discretionary" (with clear rules) system.

To echo hundreds of other full time traders, it is the money management which is more important than the actual system. An illustration of this is Eckhart and Dennis. Why has one blown up while the other one never did?

So to answer your questions:

>>So how do you trade/invest.<<

Short term discretionary momentum trading (some day trading, some swing trading)

>>What are the secrets to success as you see them/or implemented them.<<

Twofold:
1/ disiplined money management

2/ choosing low risk entries. This means that very little movement against my position proves me wrong. (i.e. buying near support etc)

>>I mention this only as confirmation that I have like you travelled the full gambit of the "education" merry go round to FINALLY discover the real way to success was/is far simpler than Id ever imagined<<

HAHA, even though we have travelled different paths, this statement is SOOOOO true. That was my greatest challenge also, learning to "keep it simple stupid".

Cheers

[tech/a]

Wayne.

Left it a while waiting for some more interest.

In reply,While I certaintly agree as a business there are a great deal of upside.
No employees
Very little overhead.
No suppliers
No Customers
Set open and close hrs.

Its as boring as hell.Takes me 10 mins a day and once a week 2 hrs.
Id no sooner sell my company and trade than fly to the moon.
But each to their own----I think many think its easier and more flamboyant than it actually is.

True re successful discretionary traders (Im yet to meet one by the way!).
But even if they have a plan/or a trading methodology Ive not yet met one that actually KNOWS his method is long term profitable.His plan is so loose that his only guide is his cheque book.
What I cant understand is that its a business like any other yet the participants dont even know how to put a forward projection cashflow of their trading together.

Yet they are quite happy to trade $20K or more with no idea if they will be profitable if they do XYZ.

Disagree re Mechanical systems.As Techtrader has been used as an example Ill use it as a case in question.
Most systems dont have enough capital to trade EVERY signal generated by the system.(contrary to popular opinion a good trading method shouldnt rely on EVERY signal being generated being traded).

So off the top of my head (to lazy to look up the actual stats).T/T could have traded 800 trades in the 7 yr test period.Capital only allowed 170 trades to be taken.
Montecarlo analysis(Best explained this way.---Like giving 20000 people your system at different times over 6 mths and all the same starting capital and telling them to trade your system for 7 yrs and comeback and report their results)over 20000 portfolios will show a result from X return on the low side to Y return on the high.

What this does is tell you that it doesnt matter what stock that triggers you trade wether it be no 1 or 6 of 10 triggered ----the end result is profit albeit some higher some lower.

As confirmation of this I know of 9 people including myself using T/T.
I have 2 eyeball filters I use
(1) Stock must be in a clear trend or clearly emerging into trend.
(2)Stock must not be ranging between defined Support and resistance over the last 2 or 3 yrs which limits upside.

Yet all other participants dont use the eyeball filter I use but their results are similar to mine!!!

Similar to a discretionary trader thinking a filter is working when in fact it does nothing!

Now we can get to the GUTS of the thread!!

Only those reading here including yourself know if they are making a buck and in your case as its your living a good buck!

Lets look at some realities.
(1) Most are undercapitalised.$100K is big bucks to them.

So lets take Joe Average short term trading with $100K.
Even a reasonable wage including super and work cover etc will mean a 100% return.EVERY year.I honestly dont know ANYONE trading in a discretionary manner fulltime doing this.Ive had a few takers on my $1000 bet to prove they can but each time Im about to book a flight to part with my K and have dinner with the lucky winner oops perhaps their trading statements wont hold up to an audit.

Now Im not saying it isnt possible just that I havent met one YET.

The maths are even worse with less $$$s.

Now I dont agree that the only way to write yourself a monthly or even weekly cheque is by trading short term infact thats one of the biggest myths i know of with those who wish to trade for a living.

Here is why.
Lets say I have a decient capital base something a decient business would cost me.say $350K you would expect (If you bought a business 30% return) $100K a year B4 tax.

Now If I have a method returning LONGTERM 20% a year (easier to achieve than $100%!!!) and I trade Margin (2X average leverage) that means I have
$ my $350K plus that lent to me by the lender $700K = $1,050,000 to trade at a 20% return = $210,000.

Why then do people think this is harder than doing the Small $ short term trading option.

On Money management.
Unless you KNOW you have a positive expectancy trading method Discretionary or Mechanical Money Management WILL not Guarentee profitability!!!!!

Your secrets to success are only part of the answer.

The secret is having profitable numbers and implementing them----no different to any business.My point is and has been borne out in this post (With you as a posible exception) is that traders JUST DONT KNOW IF THIER NUMBERS trade profitably-----------they trade BLIND DISCRETION.

tech

PS

Im interested in how you can possbly define a "Low Risk Entry".
Ive conducted 1000s of tests and statistically a "low risk entry" doesnt exist over enough case studies.

The profit is in the EXIT!

[wayneL]

Tech,

There are a few points in your last post, so I'll split them up into several posts...may take a couple days to fully answer as I get time.

>>In reply,While I certaintly agree as a business there are a great deal of upside.
No employees
Very little overhead.
No suppliers
No Customers
Set open and close hrs.

Its as boring as hell.Takes me 10 mins a day and once a week 2 hrs.
Id no sooner sell my company and trade than fly to the moon.
But each to their own----I think many think its easier and more flamboyant than it actually is.<<

Agree. The public perception of traders IS generally different to the reality. Most peoples visions of a trader is one of frenetic, stressed activity, screaming down a mobile phone, SELL SELL SELL.

Even though I am a lot busier than most traders....I trade US stocks and futures on a short term basis and have a lot of intraday charts up at any one time over several screens...most of the time it is just watching and waiting.

I can relate to you with your company. My old man ran a furniture manufacturing business...he WAS the business and the business was HIM...and likewise, would never have sold it to do something like trading.

He would have gone quite insane trying to be a full time trader, I am sure.

I on the other hand, don't enjoy traditional business. I ran a succesful one, but at a cost to my happiness and free time. So I sold.

One certainly has to be happy with there own company as a trader, but, there is a lot of communication with other traders via IRC (internet relay chat). There is information sharing, bitching, joking, etc. So one is not completely alone.

The flip side of the lonliness is the free time I now have. Since I trade at night, I sleep till about noon and spend the afternoon with my wife, generally socialising and having a great time. For me it is the perfect lifestyle, but certainly not for everybody.

more to come........

[wayneL]

>>But even if they have a plan/or a trading methodology Ive not yet met one that actually KNOWS his method is long term profitable.His plan is so loose that his only guide is his cheque book.
What I cant understand is that its a business like any other yet the participants dont even know how to put a forward projection cashflow of their trading together.<<

I've said something about this sort of comment on another thread. Tech, you have done some fabulous work on mechanical systems...publicly and for the benefit of all. I commend you for this.

But your attitude regarding discretionary trading is prejudiced and incorrect. But you are so set in this prejudice I will refrain from commenting further lest it frustrates me to no avail...well one final comment which I will repeat fro another thread...Your perceptions of discretionary trading are in fact undisiplined trading, not the same thing.

[wayneL]

OK on undercapitalization:

I agree with you here. Most traders start undercapitalised, particularly if they want to do it for a living...and agree, they imagine they will turn their $20k into a million by 4:00pm next Friday.

For a beginning trader (IF he has a positive expectancy...and thats a BIG IF) I think $250k is a minimum.

An experienced trader however can, by using low risk entries ( :) theres that term again hehe) could earn a very nice replacement wage with $100k...even $50k by trading futures.

But once again, agree that undercapitalisation is a killer.

[wayneL]

>>Now I dont agree that the only way to write yourself a monthly or even weekly cheque is by trading short term infact thats one of the biggest myths i know of with those who wish to trade for a living.

Here is why.
Lets say I have a decient capital base something a decient business would cost me.say $350K you would expect (If you bought a business 30% return) $100K a year B4 tax.

Now If I have a method returning LONGTERM 20% a year (easier to achieve than $100%!!!) and I trade Margin (2X average leverage) that means I have
$ my $350K plus that lent to me by the lender $700K = $1,050,000 to trade at a 20% return = $210,000.<<

Myth? I would like to know who appointed you as the adjudicator of myths and ultimate truths of trading?

Your example illustrates why full time traders are mostly short term. Long term systems struggle to make 20-30% year on year (unleveraged). For this I wouldnt bother trading because a normal business would be a better proposition.

Also long term trading is really only profitable on the long side (there are mathematical reasons fro this)

Short term trading incorporates both long and short trades, enhancing the probability of profit in any market conditions. I am not prepared to outwait the market hoping for enough trending instruments to appear while I draw on my capital for living expenses.

Thanks, but no thanks!!!

There is another reason for those of us trading the US market...exchange rate risk mitigation....imperfect, imprecise but effective.

If you have a bunch of longs sitting there whislt the AUD gains strength-you lose. Short term trading, short and long nullifies this risk to a large extent.

[wayneL]

>>On Money management.
Unless you KNOW you have a positive expectancy trading method Discretionary or Mechanical Money Management WILL not Guarentee profitability!!!!!<<

Expectancy=((1 + reward/risk ratio) * win/loss ratio)-1

It is true the discretionary trader must make some assumptions when calculating expectancy of an idividual trade. This is usually based on the historical behaviour of the instrument in question.

Is this any different to backtesting? I think not. The mechanical trader assumes expectancy based on HISTORICAL testing

the difference being the discretionary trader examines expectancy of each trade individually, whereas the mechanical trader calculates expectancy over an entire portfolio.

There is however a further factor in profitability...opportunity or frequency of trades. This what makes it worth sitting in front of the friggin' screen all night and why short term trading is more profitable.

I want to be clear on one point:

Your system is great and is ideal for you....and probably the vast majority of traders. I am not here to bag mechanical systems.

But for a screen jockey like myself a different approach is necessary.

What I find puzzling is the naysaying.

I post here to share what knowledge I have, and to benefit from the knowledge of others.

You seem to be agrandizing mech systems, and in particular, techtrader, by overtly attempting to discredit other approaches. Excuse me, but I feel an attack of cynicism coming on.

Last post will be on low risk entries then I'm done.

[stefan]

Tech,

I'm pleased to finally find your postings here. I do however have to agree with Wayne. Your approach is questionable. You're so convinced that only your method is the key to success that you tend to brush anything else aside. See, there are many ways to trade the market and none of them (not even yours) is offering 100% success. Different lifestyle, different points in life, limited funds, they all influence how people trade and why they do it.

You are obviously doing it for a living longterm based on tech analysis and so far you've been successful. Good for you. But if you think that you can now come along and claim that anything else will fail, then again as said before, I have to assume your judgement being affected by your success. You claim that people will not be able to trade successfully if they don't have big money to invest. Nothing could be further from the truth. You forget that not everybody is after the life you regard as the ultimate way of living. I've mentioned this before. Life is more than travelling, sitting on a lot of money and thinking that you can do whatever you like. Not to mention that you'll need A LOT more money than a few 100Ks to live a life of that magnitude.

Still, you're keen to provide some information about your method so go ahead. But you should keep in mind that it isn't the only successful way of trading. Sure, most people have a strange expectation of getting rich by the end of the week but they learn quickly that it isn't so. I personally think that the reason why most people fail is that they have underestimated the time and effort one has to put into trading to be successful. Once the train is moving, things get easier, but to have it started is quite another task.

Happy trading

Stefan

[tech/a]

Wayne

Thanks for your replies (so far) Excellent discussion.

Couple of points.
(1) Assumptions for discretionary traders relative to individual trades.
Whats the difference to backtesting.

Answer--- a great deal of difference as a backtested method wether it be short or long term looks at the overall performance over a great number of trades.Combining the results of INDIVIDUAL trades (which buy design will have a positive expectancy)over a long period or large number of trades to determine expectancy for the method of trading over a large sample period.Wether a single future or a portfolio of stocks.

There is no point in having a positive expectancy on an individual basis and a losing method when traded over a long period or great number of trades.Simply then the method of trading would not have a positive expectancy.----------discretionary traders dont have this sort of information(Unless of course they have meticulously recorded data since their first trade).

Re opportunity.Yes true you can have more winning trades with less profit/trade.As you know the less number of winning trdaes the more each win needs to be to return an overall profit.

Your approach.
Wayne I have no problem with how you trade------you know if you like it and are happy with returns.
I personally have traded glued to the screen and found it time consuming for little return.I like my sleep and social life.
Trading longer term suits me perfectly-----takes 10 mins a day so it runs in the background,its not flambouant infact its boring!But makes satisfying returns.

Techtrader.
I us it as its a working example.I sincerely wish there was a short term method posted so that also could be refered to.I'm no different to anyone else I like to have something tangable to refer to.Anyone can make statements and expect the masses to nod knowingly,I prefer to have something that people can refer to and question.

Against Discretionary trading.
Well thats not so.What I am against and hope to get home to those trading in this manner is that if you dont have the information about how your discretionary trading could or should perform over a large period of time, then your guessing everytime you trade multiple trades.Your right its undisiplined-----and thats how the MAJORITY of discretionary traders trade!!

Adjudicator of myths.

What a fantastic title---I love it!!

Again its experience albeit mine over 10 yrs.I know quite a few Accountants and Ive asked each if they have anyone who trades either fulltime and or parttime,the response is about 20 all up over 5 people.
Howmany claim a profit/ answer NONE its a deduction!
Now I also have a few friends who work behind desks at brokerage firms who have access to many others who do the same.
Question----- how many traders make money---answer--very few--- and hardly any over a period of time like 2 yrs.

Question again.Howmany trading methods are traded live on the www that are profitable over 2 yrs or more.I know of 3 and its a big place the www.

Most starting trading have little capital and (by their own impatience) little time.The myth that many trade short term and make consistant profits----let alone a living is very aluring---yet of those I do know who make a quid trading NONE are short term traders.

Many have attempted to prove to me that they can and as of today not one has or can?They get all defensive and secretive and offended,yet they give me a serve and I disclose it all!!!

Still you maybe a refreshing change!

Low Risk entries.
Could you define for me a low risk entry?

Long term trading only profitable on the long side.
True.Have a look at the ORDS and the DJI and youll find a 45 dergree climb of the index over the last X years.There are always stocks that perform in bear markets.Trick is finding and riding them.Nothing wrong with shorting just that I dont think its long term effective.Thats what Im after year in year out consistancy.

Wayne.
Finally my attitude to discretionary trading is only predjudiced by peformance or more to the point lack of performance from those who use it.This is based on past experience and thats my own and others.
Sure you can make a good $ every now and then but over 2-5-10 yrs,Ive not YETseen it!

Thanks again lookforward to your next post.

Adjudicator of Myths
tech/a

[tech/a]

Stef.

You Wayne or anyone else who trades in a discretionary manner.

Please start a thread or threads trading either a singular future or a stock portfolio traded in realtime (The time stamp verifies the time of the call of any trades)explaining the entry at the time of entry and the close at the time of close so tha I and everyone else here can benifit from the exercise.

Im not saying it cant be done-----just that in 10 yrs Ive NEVER seen it done.
People say its being done all the time but NO ONE has verified it.

Im talking long term profitable over a few years.

Your right its my belief that trading longer term will gleen more profit with less stress than short term and in particular discretionary.

Ive offered to present it here (The methodology and not Techtrader more how to discover your own longer term stratagy)but been met with basically we dont want to know who the **&%K do you think you are!

Frankly its as expected ---the usual Aussi tallpoppy syndrome!

Im happy to contribute here but cant be bothered with this sort of your predjudiced crap.

Anyone genuinely interested in recieving my thoughts can register on my email list rwi@chariot.com.au

No cost
Nothing to sell.
Just hope a few others can find consistant returns without stress from what I have learnt and APPLIED.

tech

[stefan]

Tech, I don't think it's clever to run 2 seperate threads so maybe we should focus on one of them. I've posted my response in the other one and I will only monitor that one from now on as I certainly don't see the benefit of cross posting. I suggest we merge the 2 to keep things simple.

Happy trading

Stefan

[tech/a]

Stef

OK

[RichKid]

To echo hundreds of other full time traders, it is the money management which is more important than the actual system. An illustration of this is Eckhart and Dennis. Why has one blown up while the other one never did?

So to answer your questions:

>>So how do you trade/invest.<<

Short term discretionary momentum trading (some day trading, some swing trading)

>>What are the secrets to success as you see them/or implemented them.<<

Twofold:
1/ disiplined money management

2/ choosing low risk entries. This means that very little movement against my position proves me wrong. (i.e. buying near support etc)

>>I mention this only as confirmation that I have like you travelled the full gambit of the "education" merry go round to FINALLY discover the real way to success was/is far simpler than Id ever imagined<<

HAHA, even though we have travelled different paths, this statement is SOOOOO true. That was my greatest challenge also, learning to "keep it simple stupid".

Cheers

Wayne/Tech,
I'm at the start of the merry-go-round (just got entry and passed the height restriction for little kids). I'm looking seriously at Tech's posts and the emphasis on a mechanical system and the concept of having to know you will be profitable. I am not in a position to trade a mechanical system atm and still believe I can make money if I trade in a discretionary manner (this maybe due to various biases on my part but more of that later). BUT, I'm not sure of it. I'm reading this thread as a result to test all ideas and see what suits me. I am very grateful to you both for being so open and helpful about these topics (trading systems & Money mgmt etc) as you two clearly have a lot of experience.

So my first step I suppose is going through the views in this and other threads and doing some research.

Wayne,
you mention 'Eckhart and Dennis', I suppose they are famous but I haven't heard of them (it does ring a distant bell though), could you give me a bit more info so I can do some reading (if you think it's necessary).

Tech/a,
Are there any books/articles you think I should read in relation to this specific debate? I know you mentioned once that it may be that I feel in control when I make the decisions in discretionary trading (hence a misplaced sense of security) and that appears to be one motivation for my preference for discretionary trading (kind of like 'lotto bias', except that I do propose to use anti-martingale and related money mgmt strategies as well as other risk managment techniques in my charting & stock selection (unlike the Lotto punters who just think that choosing a particular combination of numbers improves their odds).

Also love the idea of keeping it simple!! I guess I'm lazy! (but willing to do the initial hard yards).


Thanks in advance to you both!!

[tech/a]

Rich it IS simple.

Here IS the Holy Grail.

GET THE NUMBERS RIGHT.

Thats it---doesnt matter how you do it --just be as sure as you can that the way you trade has a proven track record (Paper Trade if you have to) that will end in profit.

Now I believe you can trade in a discretionary manner as well.

BUT I dont believe you can trade in a discretionary manner UNTIL you can trade in a mechanical manner.
Purely because once youve traded mechanically and particularly if you designed your winning trading method,youll know HOW to trade profitably in a Discretionary way and WHY the way you trade discretionarily will have the best chance of being profitable.

Systematic falls in there as well.

Books Ill make a short list.

[DTM]

Rich it IS simple.



BUT I dont believe you can trade in a discretionary manner UNTIL you can trade in a mechanical manner.
Purely because once youve traded mechanically and particularly if you designed your winning trading method,youll know HOW to trade profitably in a Discretionary way and WHY the way you trade discretionarily will have the best chance of being profitable.

Systematic falls in there as well.



I think I agree with you Tech because I can see that having or learning a system gives you a good basis to start/understand with first would give you a good understanding or edge. I did it the other way round and it was hard learning from my mistakes although not impossible to be successful discretionary trader. I can see that I would have a much better trader if I learnt a mechanical system. I am still learning and every mistake makes me a better trader but doing it the way I did has helped me learn things that I wouldn't have through learning mechanical syste.

I also agree with Wayne that you can be a successful discretionary trader consistantly making profits but I would agree with Tech that not many people would be able to trade discretionary withot learning how trade mechanical successfully. With options, it is also easier to make money consistantly trading discretionary if you know what you are doing.

I will look at the Tech trader system later because I'm sure it has a lot of merit.

[mit]

I'm new here but I must say from the outset that I am a mechanical trader and trade a few systems reasonably successfully. I do, however believe that a good descretionary trader can be more profitable than a mechanical trader. It is true that before they start they may not have a backtested system and know their numbers and so you cannot tell if they are good traders until quite a few years down the track.

How do I know? Well I think mainly from Forex forums especially MoneyTec. If you can get past all of the wannabes and scam artists there are a small core of people that make live calls and have been doing so successfully for awhile.

When asked for their system they might say something like that - they wait for a crossover on such and such a chart when the RSI is x. Easy, but backtests horribly. You watch them trade though, and the crossover happens and they don't take the trade because it's too near an announcement or to near a resistance point or pivot line or the market is too "limp". Alternatively, they may let a trade run a little longer because of one of a number of other reasons.

I think that they are successful because they can assimilate 1000s of bits of information into a successful strategy.

For me I don't want to spend my cash finding out that I can't trade this way and I my psych needs the comfort of solid rules that come out of an exhaustive round of backtesting. More modest gains overtime can still become big gains.

MIT

[RichKid]

I'm new here but I must say from the outset that I am a mechanical trader and trade a few systems reasonably successfully. I do, however believe that a good descretionary trader can be more profitable than a mechanical trader. It is true that before they start they may not have a backtested system and know their numbers and so you cannot tell if they are good traders until quite a few years down the track.

How do I know? Well I think mainly from Forex forums especially MoneyTec. If you can get past all of the wannabes and scam artists there are a small core of people that make live calls and have been doing so successfully for awhile.

When asked for their system they might say something like that - they wait for a crossover on such and such a chart when the RSI is x. Easy, but backtests horribly. You watch them trade though, and the crossover happens and they don't take the trade because it's too near an announcement or to near a resistance point or pivot line or the market is too "limp". Alternatively, they may let a trade run a little longer because of one of a number of other reasons.

I think that they are successful because they can assimilate 1000s of bits of information into a successful strategy.

For me I don't want to spend my cash finding out that I can't trade this way and I my psych needs the comfort of solid rules that come out of an exhaustive round of backtesting. More modest gains overtime can still become big gains.

MIT

Interesting post MIT, I was looking for alternative views on this issue and that is very useful. Probably helps that the forex market is 'purer' than some of the markets most people trade. I'm still considering this issue of whether I have to hone my skills on some mechanical system.

[tech/a]

I agree with MIT and infact would go a little further and say that trading shortterm can be more successful trading in a discretionary manner than mechanically.

When trading in a mechanical way there are set variables,sure we can have a number of OR conditions but the mechanical method gives us a best case return given those variables---its like a fixed rate of return (On singular charts),it can have deviations on a portfolio of stocks.

When trading in a discretionary manner as MIT says there can be 1000s of variables employed---consequently % winners can be dramatically increased and risk can be minimised.consecutive losses then are a factor.

But if sitting by the screen while everyone is asleep suits you then this could be the way to go.
Like most here though I havent the time and simply want a good return from money invested---with the lest effort.

[mit]

I agree with MIT and infact would go a little further and say that trading shortterm can be more successful trading in a discretionary manner than mechanically.

I was running a LT system and as it often came up with more buys than I had capital. I used to pick the soundest company with the best technicals. After 12 months of this, I ran a backtest to see who did better. Guess who did better the system or me :banghead: ?

MIT

[tech/a]

MIT.

Like you I've been developing systems for many years.

I'm interested in your comment that your method generated more signals than you could buy------.

This is true of all long term systems.As most holds in those methods I use are over 300 days and a full portfolio is 10-12 positions----there are 10's if not 100's of signals that cannot possibly be taken.

Without knowing how you develope your systems--- I cant comment on your systems developement methodology----

Point I'm making is that a well developed system will make consistant profit REGARDLESS which stock signalled makes up the portfolio.
Certaintly eyeballing is a good method for selection and one I as well have used.But if it out performs the initial method by a great deal the this should be a FILTER within the method.

This in essence could control your universe of stocks more so than your actual portolio.
Sure in the end if you had enough capital to place a meaningful trade on EVERY one triggered within the FILTERED universe then you could have an optimum method.
(I know that running EVERY stock picked in a test on my systems that the returns over 8 yrs are like the GNP of a small country!----But in practice I'd need starting capital of around $3 million.)

My current veiw is that trading by any means (Discretionary,systematically,mechanically) can be greatly enhanced by selection of stock universe--------and further enhanced by trading the composite charts of those universes (to act as a FULL portfolio entry exit mechanism).


Finally you could do better yourself IF you employed the principals that made your system profitable in the first place,you then as I have mentioned above are not restricted by those variables you have selected in your system which are rigid.
You will more than likely increase your % wins but decrease your $/trade win.
I'd be interested to hear if this was/is the case.

[mit]

tech,

I couldn't agree more. I did quite well, much better than just buying the index, but probably below average of all potential backtest outcomes for my system (A version of Alan Hull's system) . I think that this was because of my selection methodology.

If say I had 3 candidates for purchase and enough money for a single position. I selected basically on fundamentals such as low PEs/debt and the analysts calls (In commsec they have that screen that produces a score based on all analysts recommendations).

The opposite seems to be more true*. My observation is that the fully-valued and overvalued stocks just keep going and in many cases the company's business caught up with the valuation. If it didn't, well that's what stop losses are for.

I mean 18 months ago who would have bought Aristrocat. I had a buy signal three times before I bought it and it became one of my largest profits.

MIT

*There is a study done in America that seems to back this up.

[tech/a]

MIT

An interesting observation certaintly I agree,remember the likes of Davnet.

Still we are both preaching to the converted it seems.

[Hanrahan]

Hi guys, I'm new to this forum so we haven't met and I'll admit to posting on this thread before reading it all or visiting Tech's web site. But I'm very interested in the subject.

I am currently playing around with a modest bank. Have been doing so for over 5yrs and with the exception of one bad trade in ERG which slowed me down for a year until I got back in the black, I am doing quite well.

I'm in the process of selling an investment prop, I'm a beneficiary of a will and both my lady and I will be retireing in a year or so and will have some super to invest. Although I'm more interested in "investing" it would be nice to trade too.

Currently I'm doing top-down study on metals, energy and PM's to find safe sectors but then I use a scattergun approach using chat-board tips mainly to buy individual stocks. I'm been in and out of many with no harm done but I have found a few gems (BSG which I read about on Egoli) which I hold long term and trade the swings.

I am conscious of beginner's luck and have drawn down the bank to test if I can repeat my success and so far so good.

I'll study the thread and ask some Q's later.

[aarbee]

Hello guys and gals,

This is my first post. So far I have been lurking and trying to absorb the wealth of ideas on this forum. I have been educating myself in stock trading and have just about completed my first trend following long system to trade ASX FPOs. I have been paper trading for 3 months and intend to go live within a month.

mit and tech/a,

The subj of choosing one out of a few qualifying shares has been on my mind for sometime. Experienced mechanical traders seem to opine that the pick should be random but logic seems to point towards using discretion based on fundamentals etc. I understand from your posts that the random pick with no pre-concieved ideas about the stock's performance and without involvement of emotion is the way to go. Am I correct in my understanding? My intention is to be a totally mechanical trader till I have a firm understanding on trading matters.

Cheers!!

[kaveman]

Second time tried to read this through, got most way before found was skimming
having no idea who makes money at trading and how or how long they have been doing cannot comment.
but I have done the search for the pot of gold mechanical system, and yety to find one that turns profitable in real time when appied to shorter term trading. I believe from memory tec's system was medium term, (holds mfoe months)

One thing I can comment on. Mechanical systems are only discretionary trading with defined rules. You create a mechanical system from your ideas and obsevations, and decide that such and such setups could be traded. To me this is the discretion, mechanical just means you applied sets of rules and guidelines to define what you trade.

[Milk Man]

Second time tried to read this through, got most way before found was skimming
having no idea who makes money at trading and how or how long they ahve been doing cannot comment.
but I have done the search for the pot of gold mechanical system, and yety to find one that turns profitable in real time when appied to shorter term trading. I believe from memory tec's system was medium term, (holds mfoe months)

One thing I can comment on. Mechanical systems are only discretionary trading with defined rules. You create a mechanical system from your ideas and obsevations, and decide that such and such setups could be traded. To me this is the discretion, mechanical just means you applied sets of rules and guidelines to define what you trade.

And that these ideas can be thoroughly backtested- therein lies the key. You can plan to succeed- failing to plan is planning to fail.

[tech/a]

Hmm great discussion.

I tend to agree with Graham.I know Grahams Amibroker abilities go before him and I'm sure he is a capable developer of trading methods.

There are a few who I know who are accomplished systems developers (Albeit we are not of the calibre of Pring or Kauffman) and can design a profitable system.

One thing I have found in common with them ALL is that no one has reported being able to design a profitable short term systems trading method for trading a portfolio of stocks.(Distinctly different to FUTURES where there are many profitable short term methods)

This is my 3rd go at it!

I have however come to a few (Unproven) conclusions from the HRS of designing and backtesting failures.

These are my observations and my hypothesis so far--.

(1) We should take a leaf out of the Futures systems developers and simply design a method to suit 1 or at (Perhaps) maximim 2 stocks---blue chip OR Small cap--doesnt matter.

(2) Short term methods should use PRICE ACTION ONLY (Unless you have 15 min tick data) rather than Oscillators---as Oscillators in EOD form are simply FAR TO SLOW.

(3) It is entirely possible that short term methods may not be quantifiable in terms of Systems tests as the best trading methodology could well mean the incorporation of some discretionary element/s


Interested in all comments.

[mit]

Hello guys and gals,

This is my first post. So far I have been lurking and trying to absorb the wealth of ideas on this forum. I have been educating myself in stock trading and have just about completed my first trend following long system to trade ASX FPOs. I have been paper trading for 3 months and intend to go live within a month.

mit and tech/a,

The subj of choosing one out of a few qualifying shares has been on my mind for sometime. Experienced mechanical traders seem to opine that the pick should be random but logic seems to point towards using discretion based on fundamentals etc. I understand from your posts that the random pick with no pre-concieved ideas about the stock's performance and without involvement of emotion is the way to go. Am I correct in my understanding? My intention is to be a totally mechanical trader till I have a firm understanding on trading matters.

Cheers!!

I still have angst when I have more shares than money when running my portfolio system and try to pick the best. I just no longer look at FA but see which has the best chart.

MIT

[mit]

Kaveman,

I don't know if you are talking just about shares but I have a short term (1 day hold) Forex mechanical system which backtested okay (Took 9 months and playing with heaps of systems to find it).

I agree with Tech that you wont find a short term system that you can use across the asx200. Shares seem to have their own personality. I used to swing trade the shares of the company I worked for with about 80% success as it seemed to follow overbought and oversold like a text book.

After I finish the long term system. I'm going to have a look at some short term systems as well. More because I can't believe this bull market is going to last forever.

MIT

[tech/a]

Hello guys and gals,

mit and tech/a,

The subj of choosing one out of a few qualifying shares has been on my mind for sometime. Experienced mechanical traders seem to opine that the pick should be random but logic seems to point towards using discretion based on fundamentals etc. I understand from your posts that the random pick with no pre-concieved ideas about the stock's performance and without involvement of emotion is the way to go. Am I correct in my understanding? My intention is to be a totally mechanical trader till I have a firm understanding on trading matters.

Cheers!!


Sorry didnt see this until MIT answered.

There is NOTHING Random about my selection of Universe or selection of stock to trade.
Wether this selection is better than Random can be argued infinitum as my trading systems are tested on Random entry as well,and they all perform well even when picking a random entry.
Trading mechanically (unless you can log trades with a broker) for some can be as difficult to execute as one who trades in a discretionary manner.

Much easier to do if you design your own system AND you trust the integrety of your testing.The benifit of a mechanised syetm is that you have a blue print of whats likely to happen.Youll also have parameters in which to work.

Techtrader had its largest drawdown in the 3 yrs its been traded just reciently and even that was well within the tested Peak to Valley Drawdown results.It certaintly helps when your trading it and in this case dropped 30K profit in a few weeks and you have an idea what the maximums could be.
If they fall outside the maximums then Id close the method down as something is wrong with your testing.

On the point of not enough capital to take ALL trades---that shouldnt be a problem with any system as testing-----in particular Monte Carlo testing---
will show that (Or should show that) any trade is as good as the next so trade selection theoretically doesnt matter.
BUT like MIT I to select trades on a discretionary eyeball basis further filtering prospects.

Techtrader returned in testing betwen 17-28% P/A unleveraged---now I and a few others have returned around 38-48% P/A unleveraged over the last 3 yrs-----as the maximum profit of the method was only 28% in Monte Carlo testing then the eyeball filter must have a positive influence.

What is that filter?
(1) Must be in an OBVIOUS uptrend OR have clearly BROKEN a longer term downtrend.
(2) Must not have ranged over a period of years IE between $1.00 and $1.40
Unless ofcourse the breakout is from this range.

Summary.
Its shouldnt matter which one you purchase but they should have a buy signal either Technical OR Fundamental.
Selection of what stocks or watchlist you trade from (Known as your Universe of stocks) and what constitutes a buy is an important aspect but not THE most important.

Does that help?

[wayneL]

Hmm great discussion.

These are my observations and my hypothesis so far--.

(1) We should take a leaf out of the Futures systems developers and simply design a method to suit 1 or at (Perhaps) maximim 2 stocks---blue chip OR Small cap--doesnt matter.

(2) Short term methods should use PRICE ACTION ONLY (Unless you have 15 min tick data) rather than Oscillators---as Oscillators in EOD form are simply FAR TO SLOW.

(3) It is entirely possible that short term methods may not be quantifiable in terms of Systems tests as the best trading methodology could well mean the incorporation of some discretionary element/s

Tech,

I almost totally concur with you here....my comments on your three points:

1/My total universe of stocks for short term swing trading is 20 stocks...that is out of about 10,000 total on the US exchanges. More than your 2 or 3, but still severely restricted.

2/ I wouldn't bother without intraday data...I look for patterns on the daily, but trade off 15 min charts. So to agree with you, price action only, on the daily charts and a simple MA + price action on the 15 min. (taking note of sup., res., & trendlines at both timeframes)....er, well, I admit to having a 20 & 50 MA plotted on the daily...and....ummm...well, CCI/20 as well. But these are a secondary reference and make the chart prettier. LOL

3/I don't think it IS quantifiable mechanically...even on intraday data...hence my discretionary (but rule based) approach. What causes problems with testing is the volatility in the opening hour. I often have my stops violated in the opening hour...especially in the first 20 mins.

Whether I execute the stop is completely discretionary at the open. Only after the first hour has passed will my stop become absolute.

This is something you cannot code.

My historical expectancy equation has been running at around 1.5 for quite some time now so it appears to be working well this way for me.

Cheers

[kaveman]

Yes my experience is mostly on shares, although I would never try short term trading asx200, unless using leverage (warrants/options/futures,CFD etc). Oh and by short term zi don't include daytrading as that is totally different scenario picking a single days result over a series of days results which is what short term trading is all about.

With mechanical system it should not matter which trade you choose if you get multiople buy signals, and can be toss of a coin. All signals to buy are based on the same setup and as such all have the same probability of being profitable. Assuming your system is profitable overall.

The problem I see in backtesting is often that the group of stocks you would select today would not necessarily be the same stocks in trading 3 years ago. Example your basket of stocks could be asx200, but if you backtest over 5 years you would need to adjust the stocks being backtested every time a change occurs in the index listing. You cannot test a stock over last 5 years if it was not in the index 2 years ago.
Cannot recall exaclt how often the index stocks are checked, but say your backtest would need to include all stocks (including deaduns) ove rthat period of the backtest, and have a date condition for when each particular stock can be included in the backtest.
Whe I was into mechanical system searching I used a basic price/liquidity to determine the stock basket, and all stocks in the test were included from an exploration over the backtest peiod. I then included that liquidity condition in the buy conditions for the backtest.

[Milk Man]

Kave-

The index is one flaw I just realised the other day and now test just on liquidity- It must be possible to do it acurately but i'm too lazy :)

I agree with you that a system doesn't have to be mechanical to work- not that i'd know but it just seems logical to me. I see it all the time- farmers that don't plan or set rules to go by fall by the wayside. I would imagine a true discretionary system would take a great deal of mental fortitude to be able to pull off. Not saying youre wrong at all but some kind of systematic approach would surely be advantageous wouldn't it?

[kaveman]

Even discretionary traders need a set of rules to govern how they trade.


It must be possible to do it acurately but i'm too l
Loaky, what exactly would you want to do accurately

[Milk Man]

use the XJO in backtests

[kaveman]

you can do, just remember XJO only has 5 years history
List of suspects in XJO, I beleive I saw a post somewhere recently about historical consituents.
You an get the list of changes on the S&P site, and probably others. Just a matter of setting up the dates for which each ticker applies.

eg say a stock was a member before 1/1/04, and another from that date took its place
something like this

UseTicker = iif( name()=="XYZ", datenum()<1040101, iif( name()=="WXY", datenum()>=1040101, 1 );

Buy = YourBuyConditions and UseTicker;

this statement can be done easily in excel

[aarbee]

mit and tech/a,

Thanks for your comments. The Tradesim results of my trend following med term system show a 200% profit in last 10 years with a max peak to valley drawdown of 6.1%. Have been papertrading for a few months in a totally mechanical way and intend to keep it mechanical when I go live in a couple of weeks.

Cheers!!

[tech/a]

mit and tech/a,

Thanks for your comments. The Tradesim results of my trend following med term system show a 200% profit in last 10 years with a max peak to valley drawdown of 6.1%. Have been papertrading for a few months in a totally mechanical way and intend to keep it mechanical when I go live in a couple of weeks.

Cheers!!

ararbee.

Your results are 400% better than any system I have seen developed for portfolio trading over the 4 yrs Ive been involved in systems testing.48% being the best I have ever seen verified.
T/T returned around $150% from live trading but only in the 20%'s on testing.
So 200% not impossible.

The highest returns I have seen use peak and trough formulas---do you?

[GreatPig]

But is that 200% over the whole 10 years, or 200% per annum over the 10 years?

GP

[tech/a]

GP

There in lies the answer.

[aarbee]

GP and tech,

I should have been clearer in my statements. The profit of 200% in backtesting is over a period of 10yrs and not per annum. My question is if this is a reasonable return for systems with mx peak to valley drawdowns not exceeding 8-10% of trading float.

I am new to trading and still finding my feet and would appreciate the inputs of all you experienced traders.

Great forum.

cheers!!

[tech/a]

There are many aspects in a systems test that should be considered.
Return and drawdowns are just a few aspects.

Which software are you using--this will give me an idea of its reporting ability.
Risk reward ratio,consecutive losses,% winners and losers,Trade duration,even the equity chart can tell a lot.
Do you have Monte Carlo analysis capability?

[GreatPig]

The profit of 200% in backtesting is over a period of 10yrs and not per annum.
200% profit over 10 years is an annual growth rate of about 11.7%.

Cheers,
GP