[Soultrader]

Thanks for the comments Walter, Texxas, and Torero. Some very interesting points. Im very new to this system world... which is why I am still very skeptical with trading systems. I have been taught by discretionary traders only and seeing how successful they are, I always believed discretionary traders make the best traders.

Very good point on the funding part Texxas. Deep pockets is definitely a consideration especially with some of the drawdowns I keep hearing with system based traders. One of the biggest concern I have as a discretionary trader is that more and more traders are creating systems and being automated. Will the edge of a pure discretionary trader ever fade away? The market needs to be full of emotion for traders like myself to survive.... without emotions, I wouldnt know what to exploit. (of course I dont believe this will ever happen but could affect price movement?)

[Anna-Maria]

On the subject of "mechanical trading systems" & the pro's-con's etc:

One of the guys in our office zapped this missive across to me late last night.

I won't reveal the blog/trader, it's immaterial - however, it raises the complexities of this type of trading when the template/mechanics are not built & managed within a solid psychological and/or physical framework.

I think the (abridged) commentary say's it all:-


Firstly to report, results which are rather shitty, and second to suspend / close the blog, possibly forever. Reasons to follow.

First of all lets talk turkey about the results.

The month was terrible - in fact the worst that we have experienced in the 14 months trading it, however not the worst on record from our tests.

We suffered this month a 48% drawdown. We suffered this drawdown at a point when i was supposed to be enjoying a holiday in New York - it was 30% when I left the UK and 45% when i got back. Needless to say due to things beyond my control, much of my holiday was totally spoilt.

The month of December ended up at -45% on the account - from £100,502 down to £55,000 The system still works and is within parameters but the money management, which at the end of the day is the bit that creates the severity of drawdown, was at fault and has since been rectified.

We were running the account at 100% efficiency - which meant that at a max drawdown there would just be enough in the account to sustain it. what i didnt take into account was the psychological pressure of actually getting close to reaching this level and seeing the account decimated.

Even after five years of trading, the market can still humble you, and this drawdown certainly has. So if you are reading this and you're a trader - dont ever think you have this thing licked.

To this point, i hope that you've enjoyed the journey and it's with sadness that I am to close this blog.

There are a few reasons for my decision, some of which I cannot talk about at the moment, however the main one is that because of the blog I am getting emotionally involved when the system has a losing month. The fact that it's in a drawdown at the end of a month shouldnt matter because it peaks and troughs no matter what the date is - the fact it's at the end of the month is immaterial.

Getting emotionally involved in the trading of a mechanical system is not good - you start to analyse every facet of the trades and it can drive you nuts.

[torero]

I totally agree. Trading mechanical doesn't really take away the fact that you still can pull the plug or manipulate it during the trades, etc. This intervention is what makes the system worst and not stay with the performance as expected.

As I said before, my system were built on money management first. They must fit my trading style and tolerance level. All the systems I've put it on trading has then 20% maximum drawdown. So I know I'll pull the plug on it when it reaches there. It's a benchmark point where the system will have stopped working.

Most people don't understand that systems can handle drawdowns on its own, it's the owners or traders who trade them that can't handle them. This is the other reason why renting them can be an emotional panic when you don't know in full details what the system is capable of doing and not doing. I always judge the systems' soundness by seeing if any money management is in place, then see if it's within my emotional tolerance.

I learned this very quickly after deciding to go mechanical with the original belief that no more emotions will be involved. Nothing can be further from the truth.

[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.

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]

Originally Posted by 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