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Soultrader

Discretionary and Mechanical Trading: Finding Balance

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I wanted to start a new thread as I have recently gone through a transformation in my trading. For the past 3 years, I have been a purely discretionary trader relying on volume, tape, and market profile.

 

With a new market (shift from US futures to Nikkei futures) I had to dump all of my methodology and find new techniques to trade. Market profile is not a tool available through my current platform and prop firm, VSA techniques do not work as well with the Nikkei, and market profile is not as efficient.

 

First, the Nikkei gaps every single day due to the US markets and the time difference. On many occasions, the previous day profile becomes absolutely useless due to these gaps. There are no premarket sessions and as a result you can not see any premarket support or resistance. Gaps tend to not fill as well. So basically, all I have learned trading the US futures did not work with the Nikkei futures.

 

I struggled to find a methodology to trade this market. I first starting drawing MP charts manually, then started filtering out the tape, then started to focus on candlevolume charts. I realized that this market was dominated by automated systems and big lot scalpers.

 

Here is what I have done that has transformed my way of trading. I never thought I would become this type of trader. My trading is now 70% automated. I have about 6 strategies that look to exploit rejection patterns and follow trends. These are all automated through excel and give me buy/sell signals for various instruments and timeframes. I also apply parameters based on open/close/low/high/volume.

 

The only discretionary part is to decide whether to take the signal and my exit on my last quarter position. (3/4 position is fixed targets per strategy)

 

This has really changed the way I approach trading as it has taken away alot of the emotional elements of trading.

 

First, 2 years of data mining the Nikkei futures has showed me that the market trends intraday only about 25% of the time. Therefore, the edge lies in reversals and fading IB breakouts.

 

How many traders here use both a mechanical and discretionary approach in trading? The number one element that changed my trading is how I used to be glued to tape. Now, I hardly look at any charts but watch spreadsheets all day long.

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How has the transition from a system you've developed for over 4 years to this new spread sheet type trading effected you James? It must be a real shock to your system to have to basically learn to trade all over again!

 

Has your new system produced decent results for you?

 

Sounds all very interesting but also I can't imagine looking at spread sheets all day, would do my head in!

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My first month was extremely suprising and frustrating as most of the techniques that I am familiar with did not work. I spent hours and hours backtesting momentum strategies, chart patterns, candle based conditionals, and this is what I was able to come up with in approximately 1 month. I am still brainstorming strategies and devising them as the day progresses. But unlearn and learning is a very hard process.

 

I have attached a snapshot of my semi-automated trading system. Other than this, I scalp off the tape on a few stocks and the index futures through tape.

 

Spreadsheet.JPG

 

Note that I do not take any signals after 2:30pm. Anything after 3:10pm represents evening session hours in which there is hardly any liquidity.

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I see that you're operating on a slightly higher time frame than when you first started making videos on this site. I can't tell for sure but are you becoming more of a counter trend trader now? The 5 and 30 min time frames would make it easier to set up your trades when trading off the spread sheet like that. Hehe I feel sorry for your eyes though!

 

Btw love your little TRIN calculator :)

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Well I have mulled over your quite though provoking post. Despite this the thoughts have not really crystallised so I'll just spurt a couple of ideas out half baked!

 

Firstly congratulations, I think its probably a mark of great maturity as a trader that you can change markets and methods and do what it takes to get the job done. Tools are just that - its the cook that makes the meal not the robocheff 2000 delux food processor.

 

Markets sometimes just act up or maybe the trader is just off his game....I think even if he is off his game markets still 'act up' sometimes. For example recently the DAX has been 'weird' with regards volume and spread.

 

Sometimes tools need a tune up for a market. I was thinking MP - for example if there are gaps use something like Jerry's developing MP for the current day, or the MP for the last time that price traded at this level. If Use VSA on hourly bars rather than 5 miutes etc.

 

Finally where to set the discretionary <-----> full mechanical slider. That's a real toughy. Some things are inherently 'visual', channel lines, VSA, tape reading. Personally I feel a draw to these types of methods. The dowside is they are quite hard to make more 'mechanical' so discipline becomes a big issue (for me at least).

 

Anyway got to run...travelling again... for me it was a thought provoking post on a couple of levels.

 

Cheers.

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James,

 

One of my favorites: The Ultimate Trading Guide by John R. Hill, George Pruitt, Lundy Hill, is a must read for mechanical trading ideas. John R. Hill is the President and founder of futures Truth, a leading newsletter that analyzes and rates trading systems.

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Personally once I had a system that I was really confident in, which was in essence really quite simple, I wouldn't hesitate to automate a large part of it to deal with the most basic set ups simply so I could have more time to watch other setups. While I'm not a fan of 100% mechanical systems I do believe they can be beneficial when you use them to free up time that could be spent on other trades.

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How many traders here use both a mechanical and discretionary approach in trading? The number one element that changed my trading is how I used to be glued to tape. Now, I hardly look at any charts but watch spreadsheets all day long.

 

Dohhh...I have forgot to even check the premium section of this board in months.

I've just started to move down this path as I'm finally getting the hang of C# and Ninja.

James, what are you using to data mine, just excel? Thats absolutely my focus right now. Have you ever read the "System Development with acrary" thread on elite trader? I think thats far better than any systems book available. One thing he mentions in there that I would like to eventually evolve towards is he has his automated systems and then when he is around he tries to front run them discretionary wise. I think thats a pretty interesting way to trade.

Here is the first potentially useful thing I've done with data mining(if you can call it that) Basically tried to take the daily average range of 5 minute bars on SPY with Ninja and then plot them in Excel. Seems to be a pretty interesting indicator of volatility. The data is not totally accurate as I think I'm missing some of monday morning sessions from my newbness with ninja. Its interesting how that first big spike up in feb 07 had more volatility and a bigger range but was orderly. Current volatility/range is just schitzo.

SPYrange5min.jpg.3a85c58c7e35d37185ec4702982da126.jpg

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Here is what I have done that has transformed my way of trading. I never thought I would become this type of trader. My trading is now 70% automated. I have about 6 strategies that look to exploit rejection patterns and follow trends. These are all automated through excel and give me buy/sell signals for various instruments and timeframes. I also apply parameters based on open/close/low/high/volume.
This is precisely what has happened to me over the last few months. I have gone from a discretionary trader with some mechanical rules to mostly mechanical. The biggest change I have seen is how I manage my money. With my discretionary style I would put large positions on and start the scaling out process quickly with a distance target area for the last trailer. With my mechanical trading I use less leverage and exit at one to three target areas depending on the setup. The surprising result is that my average profit has almost stayed the same. However, these two systems are not equal by any means! The mechanical style has been more consistent (less draw down) and has allowed me to explore trading multiple instruments. These advantages are extremely important when scaling up. My current goal is to make the research and recognition part as automated as possible so I can keep track of dozens of instruments and only trade the highest probability setups. Of course like everything else in trading...easier said than done. Programming can be a PAIN IN THE A$$.

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I wanted to start a new thread as I have recently gone through a transformation in my trading. For the past 3 years, I have been a purely discretionary trader relying on volume, tape, and market profile.

 

With a new market (shift from US futures to Nikkei futures) I had to dump all of my methodology and find new techniques to trade. Market profile is not a tool available through my current platform and prop firm, VSA techniques do not work as well with the Nikkei, and market profile is not as efficient.

 

First, the Nikkei gaps every single day due to the US markets and the time difference. On many occasions, the previous day profile becomes absolutely useless due to these gaps. There are no premarket sessions and as a result you can not see any premarket support or resistance. Gaps tend to not fill as well. So basically, all I have learned trading the US futures did not work with the Nikkei futures.

 

Surprised to read this and curious about it as well... aren't we taught that most principles and 'guidelines' work amongst all markets, regardless of what timeframe we choose or what kind of market it is (provided there's sufficient liquidity)?

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Soul is correct.

 

The US tricks don't work well on SPI or STW either although at least Wyckoff style volume interpretation works intraday with them. With HSI even the volume is unreasonably deceptive.

 

Personally I establish intraday trends and then microswing trade the trends until they reverse (if they do) and then swing the other way.

 

Here's a 15 min spi chart. SPI trades ~24hrs so you can see the effect of the Euro/US timezones which I show blue on my charts.

.

spi15.png.91717d3df7e330e5d27b9684edcb8b44.png

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