[Reaver]

Originally Posted by ant »

For me, discretionary trading is more about adjusting trade strategy to market condition and market behavior, not necessarily "overriding" trade signals that can be programmed and automated. I believe that one can program many, if not all, of LBR's trade setups if taken in isolation, but that won't lead to profitable trading - she admits that. Her trade setups basically identify market tendencies that can provide an edge under the right market conditions. So what are the "right" market conditions? That's one area where I prefer to use discretion. Sure, I can use stuff like indicators to describe patterns and market conditions to a computer so that it can determine what type of trades to take, but that description is usually too rigid, IMO. Our brain processes so much information and goes through so many steps to accomplish simple things that we usually take it for granted until we have to teach someone something or describe it to a computer in the form of an algorithm. Our right-brain abilities, such as pattern recognition and synthesizing information, is very awkward for a computer to accomplish accurately and efficiently, yet we can often perform those tasks quite proficiently if we know what we are looking for. I believe that pattern recognition is a key skill that expert traders possess. So generally speaking, that leads me to believe that discretionary trading is the "better" path to achieve expert trader status, if one is to get there (just my opinion). I also believe that it would be impossible right now to get computers to "think" the way human beings think and draw conclusions. Although I believe in keeping it simple, I do acknowledge that the market is a complex entity that cannot be mastered without market understanding or by getting "green light/red light trade signals" from a computer. As Einstein said, "Make everything as simple as possible, but not simpler." I think that many trade strategies being used are "too simple" for a changing, fluid market. Wow, a lot of opinions, views and ramblings here, but I've written this much so I think I'll continue.

Understanding price action and market behavior - how auction markets work - through Market Profile is one component of my trading methodology. This is the component that makes my trading discretionary. In short, my trading has been heavily influenced primarily by LBR, Wyckoff, and the books Mind over Markets and Markets in Profile. Below are some examples of factors that I consider during my routine nightly preparation and during the trading day. For me, these factors lead to market understanding (which is whatever I can glean from the markets given my limited trading experience) which helps me determine trade strategy, trade location, risk, stops, targets, etc. It also helps me determine how aggressive I should be in the markets. There is a lot of subjective stuff here, but I think I structure it in a systematic fashion. Anyway, here are examples of stuff I look at for my trading.

• context, such as what is currently driving the market and what are the long-term, intermediate-term and short-term market conditions
• long-term, intermediate-term and short-term support/resistance levels
• was a market rally driven by short covering or long liquidation and is new buying/selling coming into the market
• bracket and balance area extremes
• areas where price is rejected and accepted
• where do traders have resting stop orders
• how are traders feeling about their open positions
• where are traders' setups likely to trigger
• market correlation (especially between the ES and YM)
• pattern recognition in price action and Market Profile shape
• market volatility
• volume analysis
• market internals

By trading using a discretionary style, I hope I can pick up on market nuances that will provide an edge in my trading. I believe that learning to pick up on these nuances, which comes through extensive experience, will lead to becoming an expert trader, which is my aspiration.

Folks, I know many of you will disagree with my views, but please note that no offense was intended nor was this post directed towards anyone. I am simply presenting my perspective as a developing trader.

P.S. Blowfish, and you thought you went off on a tangent.

Hey Ant, I definitely do not disagree with you. I think you hit the nail on the head! I think that is the epitome of a discretionary trader. Study a range of factors and decide what they are telling you.

Reminds me of what William Gallacher said, in that as great as computers are, you cannot teach it to do things that humans can do intuitively...

For instance, when you look at someone's face, how do you recognize it? Yes, you can say there are certain characteristics about them that stick out, but that is not really how you recognize THEM. It merely narrows down your possibilities of who it is. You cannot really program that sort of thing into a computer. There are many many many factors that your brain pulls together for you that would be impossible to explain or program into a computer.

Yes, purely systematic trading relies on probabilities and statistics as well....but without a human brain to interpret the data, this could lead to doing some pretty stupid things.

Just because you know that most speed limits on highways are 55 mph, doesn't mean that if it is snowing and sleeting that you should still drive 55 mph...or if the air in your tires is low or if you have worn brake pads, etc.....

You can do some amazing things with computers, and obviously, as demonstrated by some of the most famous traders out there, you can make money trading using programmed systems, etc.....

But then again, you could in theory go play out in the street every day your whole life and not get run over by a car either...but I wouldn't recommend trying it.

[ant]

James, a lot of great information. If one were to research the ideas in your post, one can create a robust trading plan, IMO.

Originally Posted by Soultrader »

7. And finally VOLUME. If you have no idea how to read volume, I personally think you need to find another job. lol Ever watch bloomberg and see the market analyst pulling up a candlechart with no volume? I would fire him on the spot. Volume is as important as price. Those two should never be seperated.

Volume is one of the few pieces of market-generated information available. It provides important clues regarding the conviction of traders/investors. In my opinion, learning to interpret Volume is what will make a trader a viable opponent in the markets. There is no doubt in my mind that most professionals use Volume in their trading.

Reaver, well said! You made the point better than me regarding the human brain vs computers. And yes, I agree that traders can be successful with mechnical systems; however, it is becoming increasingly difficult. Those traders who take time to develop market understanding will most likely be successful with any trading approach, discretionary or rule-based. The problem I see is with traders who don't take the time to learn to read price action and turn to indicators and mechanical systems because they want to start trading right away. They are looking for shortcuts in a business where there are no shortcuts. Unless of course we get lucky like with the internet bubble of the late 90s.

[ppperkins]

I am new to trading, but I was a geek among computer geeks back in the day. Here is a summary of a few conversations I've had with a few hedge fund developers that I know.

1. You have to take the good with the bad when dealing with automated software. Programs make constantly make bad trades that a good discretionary trader would not make. They overcome this with sophisticated money management tools. A bad trade by a computer is the same as a bad trade by a person, it puts money on the table for someone else.

2. An automated system may backtest really well, but can do terribly when actually implemented. New software is often retired because a new player such as a hedge fund can throw off the dynamics that make the strategy successful and a system doesn't automatically adapt. As the market becomes "more chaotic", as some have argued in earlier posts, automated systems will become harder to implement successfully. Over time, I believe that this will become very expensive to support unless significant sums are involved. I don't know if there is enough evidence to say that cost/benefit of using an automated system will always win out.

3. As has historically been the case, larger sums of money continue to be pushed ino large institutions. If a fund is trying to liquate a $200M position, they have to expect a certain amount of inefficiency in the transaction. That leaves a lot of opportunity for crumbs that the quick and nimble can eat up.

4. OTC products are REALLY, REALLY hard to automate.

[WHY?]

Originally Posted by 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.

This would go along with George Douglas Taylors beliefs...Tom Williams...and many others. The months and months to unload means they have to manipulate the markets to do this. They have to set themselves up to accumulate and distribute and all this takes time.

My thoughts on the discretionary traders place in the future: There will always be a place for him. Adaptation will be required but his place is secure. Think of all the automated processes NASA has in place for the space shuttle. Yet every flight must have, and needs human decision making and input. Will we ever fight our wars with robots? Perhaps, to some degree but never completely. Our ego would not allow that. Neither will it for trading. As long as there are markets there will be humans involved in making trades directly. My .02 worth! We will figure out how to beat the machines!

[Reaver]

Good points WHY....I like the NASA analogy.