Discretionary Trading vs Automated Trading

[scalptrader]

Who is your broker? You tried just using limit orders?

[momentom]

Problem with limit orders is that the market trades there but you don't get filled. This means one of two things:
Your system thinks you are filled and you are not, or,
You miss many profitable trades and get all the losers whick makes your back testing useless.

[torero]

	Quote:	momentom
	The biggest issue in mechanical systems for me is EXECUTION. Slippage is an enormous problem as is the system getting out of sync with the actual fills. My systems trade about 20 times a day.

From testing out many systems on my own. Slippages and commissions must be set as realistic as possible. Limit orders will hide the fills in backtesting but in real trading, you'll get bad trades and good trades will be missed (everyone is out to get that fill too). 20 trades/day is alot of trades, comms and slippages will eventually eat up your profits long term.

[ezduzzit]

Hrrummpff! A very interesting thread, to be sure. I think Ant, Torero and Walter nailed it all down pretty well. I am probably older than most of you and I seem to recall LTCM (Long Term Capital Management) putting together billions of dollars, the best tacticians, the most powerful computers and coders who could probably program rockets to Mars and beyond.. in an attempt to use their edge in automated system trading and clean house.

Well, house was cleaned all right. Despite all the best resources available, not only were they unable to win more than they lost, they collapsed in spectacular style soon thereafter.

In other words, boys and girls, it ain't worth it, but I know that won't discourage most of you from attempting it nevertheless. Of course marketers like Modus and others will pronounce that the powers that be have taken a factual survey and 75% or more of the pros and big institutional players succeed only by using an automated system. Well, lest ye forget, they can afford some very significant drawdowns, which are precisely what kill most of the retail traders in their valiant attempts to play like the big boys. Additionally, they have a full cadre of analysts, computer whizzes, etc.. on hand at all times running up to date scenarios with informational access that you can still only dream about. Additionally, until they collapse, you never hear about their whopping losses or their real ROI, etc.. so best to stick to your own knitting and for most, that is going to still come down to being a discretionary trader. When the computers can do it all without effort on your part, the game will be over or they will change all the rules anyway.

Happy Trading

[Pismo10]

You have to design these backtest limit orders so they only get filled when the market moves one tick past your limit. You rarely sell at the ask or buy at the bid. Certainly nothing you can depend on. This has to be taken into account when programming. Tradestation/Easy Language does not take this into account, you need to program it yourself. Tradestations ProftTarget strategy will fill limit orders on a touch which is not realistic at all.

[syswizard]

	Quote:	Pismo10
	You rarely sell at the ask or buy at the bid. Certainly nothing you can depend on. This has to be taken into account when programming. Tradestation/Easy Language does not take this into account, you need to program it yourself. Tradestations ProftTarget strategy will fill limit orders on a touch which is not realistic at all.

I disagree here....for one, e-mini futures fills with limit orders (buy@bid,sell@ask) have been filled about 80% of the time. However, my experience with Nasdaq stocks was about the opposite.
For another, one thing to do is to backtest with the Limit orders, and then in real live trading, make them MIT orders.....most platforms are supporting those now.

[torero]

80% of the time pretty much screws the reliability of the backtest results wouldn't you say? You want to test as close to 100% real world environment as possible. Those 20% could well mean all the winning trades that never happen. IMO I wouldn't even continue testing if I cannot find a 99% of the results resembling live trading.

[DrEvil]

	Quote:	Soultrader
	With the advancement in technology and improvements in trading softwares, many intraday traders are now automating their trading. There are advantages to this... emotions can be eliminated (not completely but more than discretionary) and traders can use mechanical exit points. Example: scaling out at +10pts on every trade. As a pure discretionary trader, I still believe there is an edge in discretionary trading. Intuition comes into play as well as better entries. Why better entries? If one is a good tape reader he can pinpoint his entries and take minimal heat. This can save a trader a ton of points in the long run. I have a couple questions regarding this topic and could use your guys opinion. Do you think discretionary traders enter before automated traders? What are your thoughts on discretionary vs automation? What type of trader are you and which one do you prefer?

Soultrader, I'm relatively new to trading (less than a year). I have made a decision to be a discretionary trader. I trade forex, using only price, candlesticks, support and resistance. Looking for breakouts of channels, consolidations and trendlines on longer term charts, then taking the signal in same direction on an hourly chart. More or less this is my style of trading so far.

I read everywhere that backtesting is essential to succeed. As I mostly trade off price patterns, how can I backtest? If I can't backtest how can I put together statistics like, percentage winners, losers, drawdown etc.

Any answers greatly appreciated.

Thanks,

Soultrader

[wsam29]

I'm not Soultrader but I will explain this thanks to Jason Alan Jankovsky's book.

Volume is what drives prices higher or lower. Volume is caused by some other trader who is either getting into or out of a trade.

Spot FX being an unregulated market does not have a centralized exchange to post volume. eSignal provides volume to their FX data.

Price patterns alone do not tell the full story, what you need to be aware of is the volume in relation to the price pattern to get a higher probabiltiy of one thing happening more than the other.

I have tried trading FX just off price patterns because "thats all the FX market has to look at." Lets just say I am not a big fan of the FX market, not because I cannot trade it but rather the lack of infomation.

I have found that understanding trading psychology and behavior yields much greater results than relying on technical patterns and indicators to decide what course of action or inaction to take.

The way to see that behaviour is through the analysis of just price and volume.

There is alway some discretion to your trading, you still need to decide to take the trade or not when you think about it.

[Soultrader]

	Quote:	DrEvil
	Soultrader, I'm relatively new to trading (less than a year). I have made a decision to be a discretionary trader. I trade forex, using only price, candlesticks, support and resistance. Looking for breakouts of channels, consolidations and trendlines on longer term charts, then taking the signal in same direction on an hourly chart. More or less this is my style of trading so far. I read everywhere that backtesting is essential to succeed. As I mostly trade off price patterns, how can I backtest? If I can't backtest how can I put together statistics like, percentage winners, losers, drawdown etc. Any answers greatly appreciated. Thanks, Soultrader

Hi DrEvil,

I trade discretionary but I have rules for each trading setup. I dont use a backtesting software though. What I do is keep track of each setup on a spreadsheet everyday and keep up with the data. If I see some setups failing to work after a while, I will observe it and see how I can improve it. It would be pretty much impossible to backtest most of my setups as I rely heavily on internals and tape. I also like to think in terms of market concept such as asking Why or What.

Soultrader