Discretionary Trading vs Automated Trading

[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?

Thanks,

Soultrader

[ant]

	Quote:	Soultrader
	Do you think discretionary traders enter before automated traders?

I think this depends on how aggressive a trader is. For example, if a trader is looking to fade a key support/resistance level, does the trader enter while the market is moving towards support/resistance or after the market turns? Take another example, let's say a trader is looking to play a reversal from a downtrend, does the trader wait for the higher high and higher low to be in or does the trader anticipate that the higher high/low is coming based on somthing else? I don't think one can make a blanket statement here. I believe it comes down to experience and intuition as opposed to a mechanical or discretionary style.

	Quote:	Soultrader
	What are your thoughts on discretionary vs automation? What type of trader are you and which one do you prefer?

I'm a discretionary trader for two main reasons. First, there are too many variables that I look at to capture in a mechanical system. Secondly, a mechanical system tends to be too rigid. For example, let's say that the market is a tick away from an entry/exit and then turns around, the entry/exit would not trigger on a mechanical system. I don't think that trying to "program" a discretionary style into a mechanical system makes too much sense. Think of the complexity.

Of course, one of the advantages of a mechanical system is that it is consistent in the way it executes. Discretionary traders need to make sure that their trade decisions are made in consistent and systematic way so that they can continue to replicate in the future and determine what has been working over the longer term. Discretionary traders should not let too much subjectivity into their trading, otherwise they don't have a system. Maintaining a trading log and journal are critical to success for a discretionary trader, IMO.

[torero]

I agree. This is why many successful system traders advise to keep their system open and flexible, the less variables the better. This is also why higher timeframes work so well vs. intraday trading. I have 3 working systems and they do a nice job of capturing the essence of the market direction with only 1 indicator and price is the other indicator over time.

I discretionary trade because my mission is to understand the markets as much as possible before getting more into system trading. I want to know how the market works for myself before building more. Took me 2 yrs to come up with 3 systems so I figure my learning curve in building them would increase as my discretionary gets better.

[enlightedtrader]

	Quote:	torero
	I agree. This is why many successful system traders advise to keep their system open and flexible, the less variables the better. This is also why higher timeframes work so well vs. intraday trading. I have 3 working systems and they do a nice job of capturing the essence of the market direction with only 1 indicator and price is the other indicator over time. I discretionary trade because my mission is to understand the markets as much as possible before getting more into system trading. I want to know how the market works for myself before building more. Took me 2 yrs to come up with 3 systems so I figure my learning curve in building them would increase as my discretionary gets better.

Hi torero,

I'm curious on average how many trades you get daily in your intraday trading system. From my understanding, it is difficulty to get more than 3 trades a day for an automated system. This is also one of the aspect I prefer discretionary trading over automated trading. A discretionary trader has the flexibility to trade by adjusting to different market conditions. He/she can be both a scalper and a swing trader. I'm not sure whether automated system have such a flexibility.

Another aspect I prefer discretionary trading over automated trading is lower drawdown. I read something about the drawdown of automated system. It usually ranges from 20% to 50% annually. It's just too high, IMO. A good discretionary trader can have much lower drawdown as long as he has a sound trading method and good money management.

[scalptrader]

	Quote:
	I'm curious on average how many trades you get daily in your intraday trading system. From my understanding, it is difficulty to get more than 3 trades a day for an automated system. This is also one of the aspect I prefer discretionary trading over automated trading. A discretionary trader has the flexibility to trade by adjusting to different market conditions. He/she can be both a scalper and a swing trader. I'm not sure whether automated system have such a flexibility.

See the attachment. 100% automated, even the execution.

I trade a portfolio of systems, no discretionary trader can come close to duplicating these results. From a conceptual view, the human mind could never find such systems, (I don't use AI). And from an execution view, any trader would burn out after a couple months trading something like this manually!

	Quote:
	I'm a discretionary trader for two main reasons. First, there are too many variables that I look at to capture in a mechanical system.

Yes there are so many variable, but dont forget the simple stuff always works better, especially for discretionary trader. You should be using no more than 3 non correlating technical reason reasons to enter a position. Anything more and confusion starts to creep in...

The main problem most trader face is they lack the technical skills required to implement automated systems. Start learning programming if you are serious!

[enlightedtrader]

	Quote:	scalptrader
	See the attachment. 100% automated, even the execution. I trade a portfolio of systems, no discretionary trader can come close to duplicating these results. From a conceptual view, the human mind could never find such systems, (I don't use AI). And from an execution view, any trader would burn out after a couple months trading something like this manually! Yes there are so many variable, but dont forget the simple stuff always works better, especially for discretionary trader. You should be using no more than 3 non correlating technical reason reasons to enter a position. Anything more and confusion starts to creep in... The main problem most trader face is they lack the technical skills required to implement automated systems. Start learning programming if you are serious!

scalptrader:

The chart from your system looks very interesting. It seems to me you are using some simple cross average at short time frame in your automated trading system. I'm wondering how the system performs at choppy market conditions.

Do you leave your system operate overnight or you just have it operated during regular trading hours? I guess sometimes the overnight spike may bring big trouble for an automated system if the system is not designed very well in this aspect.

Since you said that ''...no discretionary trader can come close to duplicating these results...'', I'm curious to know what's the return/drawdown of your totally automated system during its life span. Frankly speaking, I really doubt it can beat a good discretionary trader.

Thanks.

[scalptrader]

From a conceptual view, the human mind could never find such systems, (I don't use AI). So there is no point trying to guess. The rules will not make sense to you any way either!!

[enlightedtrader]

	Quote:	scalptrader
	From a conceptual view, the human mind could never find such systems, (I don't use AI). So there is no point trying to guess. The rules will not make sense to you any way either!!

Scalptrader,

I don't want to know the rules. I just want to know the results (return, profit/loss ratio, drawdown, etc.) if you are willing to share. No matter what approach/method/system adopted, ultimately only the results can be the final judge.

[torero]

	Quote:	enlightedtrader
	Hi torero, I'm curious on average how many trades you get daily in your intraday trading system. From my understanding, it is difficulty to get more than 3 trades a day for an automated system. This is also one of the aspect I prefer discretionary trading over automated trading. A discretionary trader has the flexibility to trade by adjusting to different market conditions. He/she can be both a scalper and a swing trader. I'm not sure whether automated system have such a flexibility. Another aspect I prefer discretionary trading over automated trading is lower drawdown. I read something about the drawdown of automated system. It usually ranges from 20% to 50% annually. It's just too high, IMO. A good discretionary trader can have much lower drawdown as long as he has a sound trading method and good money management.

It's true that my systems don't trade everyday despite using intraday charts. The conditions to trade only when the direction is already confirmed. I use the same money management in these systems as my discretionary trading, so any DDs would be the same. I aim to create systems that can emulate my style and risk tolerance else I'd never trade them. This is the reason why there are many systems out there that seem profitable but the DDs are so large, I don't have the guts to withstand the DDs. I have to pass them up.

This is the difficult part in system trading is that no system can trade more than 5 trades a day and stay profitable. Slippage and commissions will eat it alive. The feedback from traders in TS forums have confirmed this. Higher timeframes have better chances of lasting longer and be profitable. So less trades greater profitability.

[Soultrader]

	Quote:	ant
	I think this depends on how aggressive a trader is. For example, if a trader is looking to fade a key support/resistance level, does the trader enter while the market is moving towards support/resistance or after the market turns? Take another example, let's say a trader is looking to play a reversal from a downtrend, does the trader wait for the higher high and higher low to be in or does the trader anticipate that the higher high/low is coming based on somthing else? I don't think one can make a blanket statement here. I believe it comes down to experience and intuition as opposed to a mechanical or discretionary style. I'm a discretionary trader for two main reasons. First, there are too many variables that I look at to capture in a mechanical system. Secondly, a mechanical system tends to be too rigid. For example, let's say that the market is a tick away from an entry/exit and then turns around, the entry/exit would not trigger on a mechanical system. I don't think that trying to "program" a discretionary style into a mechanical system makes too much sense. Think of the complexity. Of course, one of the advantages of a mechanical system is that it is consistent in the way it executes. Discretionary traders need to make sure that their trade decisions are made in consistent and systematic way so that they can continue to replicate in the future and determine what has been working over the longer term. Discretionary traders should not let too much subjectivity into their trading, otherwise they don't have a system. Maintaining a trading log and journal are critical to success for a discretionary trader, IMO.

Thank you Ant. I have yet to go on a mission to designing a pure mechanical system. The methods I have learned and apply in trading are far too complicated to program. How would one go about programming tape reading? Pretty impossible I'de say. At the same time discretionary traders need to approach the markets in a very systematic way: Trading off setups, controlling losses, target points, etc...