[Dogpile]

This is a highly interesting topic and subject of recent books.

To me, it is clear that program trading can dominate at times. If you do not remain flexible, you will get run over by these competing algorithms that are written by extremely smart people trying to take your money.

But there is a good argument to be made that all these competing algorithms actually make 'right-brain' synthesis of complex, dynamic information MORE important. If so much money has so much compute power running mathematical programs, then the market is saturated with 'left-brain' compute-intensive strategies.

From Daltons latest newsletter (May 2007);

Successful trading is for those individuals that can continually combine the left and right hemispheres of the brain to appreciate what is occurring in the markets.

From our bookshelf:

During our trip to Chicago last month, Jim and I were introduced to a book containing a significant amount of thought provoking information. Our thanks go to Linda Raschke who introducing it to us as a 'must read'. The book, 'A Whole New Mind' by Daniel Pink, focuses on the power of whole brain thinking and how the right-brain will play an important role in the future in ones success. Chapter 6, "Symphony", provides insight to Pink's thinking.


Chapter 6 - Symphony - In this chapter Pink demonstrates how there is far more than just focusing on the identifiable, mostly left hemisphere, facts. He discusses the importance of invention and conceptual big picture thinking.

If we were to relate Pink's chapter entitled "Symphony'; to trading we might experience:


The ability to create something new and / or different such as a new type of chart, or a way to display or interpret volume, or understand a new shape nuance in the Market Profile graphic.

The ability to create meaningful pre-session and post session narratives to better prepare yourself for the following trading session. (DLC's next educa-tional letter will expand on the narrative idea.)

The ability to synthesize, combine or correlate unrelated ideas or parts into something unique and beneficial such as synthesizing the relationships between different markets and understanding how the markets different timeframes, coexist, interact and merge.

The ability to observe, interpret and understand the subtleties and nuances of human behavior as reflected in the markets order flow by understanding inventory balances and imbalances.


Today, as you know, we live in the age of information overload. Facts are at our fingertips via search engines, the media, and dial-up information services actually make information less valuable while making its relevance, interpretation and understanding more valuable. In other words, it is our ability to think with our whole brain - not just left or right, that will separate us from our competition. It is this focus that makes this book a 'must read'.

This book challenges the reader to go beyond their conventional and structured ways of thinking that were developed by both upbringing and environment. In many ways it is in the same category as Malcolm Gladwell's 'Tipping Point' and 'Blink' in respects to looking at how we look and think about things. "

[brownsfan019]

Here's my 2 cents - the more things change, the more they stay the same. If you have an edge and can exploit it with consistency, you can/will make money whether discretionary or automated. I think more and more bots will enter the markets (and add more liquidity in the process) but there is one constant - a computer programmed software package will eventually fail. There are few (if any) computer programs that can survive up, down and sideways markets.

Point being that no matter what, it is human emotions that will drive the markets. Even if a computer program is calling the shots, a human has the ability to over ride the system and decide when to turn it off.

A good example I can think of is when online stock trading became mainstream (ETrade, Ameritrade, etc.) stockbrokers (like myself at the time) were being told that this was the death of that profession. Why should I pay hundreds of dollars per trade when an online broker will do the same for 10 bucks?!?!? Guess what? The full service firms are doing just fine and their businesses continue to grow. Having been in that business before I try to keep a close eye on how the brokers are doing and they are fine.

There's always going to be a reason why discretionary traders will die. And many will. And many will use that a reason for their failure. I saw it all the time at the brokerage firm with the failures - can't compete with online, can't compete with no load funds, can't compete with ETF's, etc.

As much as a cliche as it is, only the strong will survive and for those that do survive, the journey will be well worth it.

[Dogpile]

One thing big program trading firms can't do is carry positions with resting stops that get executed without slippage. I am talking about the big institutions here, not the nimble < $1B hedge fund.

To the extent that all trading involves probabilities, not certainty -- the use of stop-loss orders limits losses for all the times where you suffer 'variance' to the expected result. Especially in a world where the 'non-linear break' is always a risk due to growth of derivatives.

There is really only one good reason why a LTCM can blow up -- they could not get out of their positions. Being nimble is a real advantage.

[brownsfan019]

dog is right, being nimble has its advantages. I remember when I would visit mutual fund co's that were trying to get us to sell their funds and one of the biggest (American Funds) and one of the best would tell us that it takes MONTHS to build and MONTHS to unload a position. When you get so big, you have to enter positions in such a way as to not raise any flags which is easier said than done.

There's something to be said to be able to flip on a dime, but that also implies you are trading very little in the grand scheme of things. I'd like to think of myself as a nimble, bigger little guy.

[Dogpile]

A quote I liked from 'Mastering The Trade':

"Some of the best traders I know have been trading the same set-up on the same timeframe on the same market for 20 years." pg 31

[darthtrader]

i think its interesting if you look at the CTA's on autumn gold i would say probly 90% list themselves as systematic instead of discretionary. the funny thing is though the 10% with really great returns list themselves as discretionary.
i wouldnt doubt its something like a Rentech/Jim Simmons effect. With how good they have been doing now everyone wants to be like Jim Simmons and discretionary is a dirty word.

until we have computers as powerfull as the human brain i don't think we are in much trouble.

[ItalianSharp]

Big institutions use highly sophisticated automated programs for their trading; they have the best and fastest connections to the markets; they have the best trading platforms. All this makes it nearly impossible for a private trader to compete with them on the same ground. Basically, if you go for the automated stuff, you'll always be one step behind the institutionals.

However, I do believe private traders have a big edge over institutionals. This edge is CAPITAL and being able to liquidate positions at any given time with almost zero slippage.

Discretionary trading is the way to go if you want to compete against those monster funds, banks, bots, whatever you wanna call them.

You have to be good at it, but you can do it. And things will likely improve in the future because there will be more participants bringing more liquidity.

Last but not least, markets will always be driven by fundamentals. Although there is an increasing tendency to automize everything, there will always be the need for human flexibility and interpretation of market conditions.

IS

[ant]

A lot of excellent responses here, so I'll just add to some of the themes already mentioned. It is my opinion that to be a viable opponent in the markets, traders will have to rely on the abilities that make human beings superior to computers. We all know that the human brain cannot compete against a computer when it comes to routine, raw number-crunching, analytical, information-based tasks (i.e., purely left-brained abilities), and this applies to trading strategies that can be programmed and automated. We currently live in an information age where there is an abundance of information and incredibly fast computers. This sets the stage for efficient automation. Computers are significantly faster, they can process vast amounts of information in significantly less time than humans, they don't get tired like people do, and they don't make errors. Generally speaking, if you are an individual trader with a trading strategy that can be described in a finite number of steps, a computer will be able to trade it more easily and better than you. I agree with ItalianSharp when (s)he wrote:

Originally Posted by ItalianSharp »

Big institutions use highly sophisticated automated programs for their trading; they have the best and fastest connections to the markets; they have the best trading platforms. All this makes it nearly impossible for a private trader to compete with them on the same ground. Basically, if you go for the automated stuff, you'll always be one step behind the institutionals.

So in my opinion, very few automated, systems traders will be able to compete with institutions that have the best minds, deepest pockets, fastest computers, best automated trading systems; in short, the best, and most abundant, resources. So what type of trader do I think will be able to compete with the institutions? Discretionary Traders. Specifically, traders that combine the analytical, problem-solving skills found in the left hemisphere of the brain with the human abilities carried out by the right-side of the brain. These right-brain abilities include seeing relationships and integrating those relationships into the big picture, pattern recognition, focusing on context, creatively combining ideas, understanding what your competitors are doing and how they may be feeling, and looking at the markets in new and different ways. The list goes on, but these are all examples of areas where human beings excel over computers and the focus of most discretionary traders, I think. Traders that use a holistic approach, combining left and right brain abilities, will be able to continue to compete in the financial markets against institutions with vast computing resources. Anyway, this is my current belief which has shaped my trading style and methodology.

Soultrader, I think you started a thread on an important topic that will be discussed heavily by many traders as time goes on. I believe it's important to consider how we plan to adapt in a world that's becoming more and more automated.

Recommendation: Read "A Whole New Mind" by Daniel Pink, an easy, enlightening read that discusses this subject in more detail. Dogpile mentioned this book in one of his posts.