Can completely discretionary traders every succeed?

[martys]

Quote from BSAM:

He did indeed, but he wasn't trying to imply mysticism, as others seem to express from time to time.

I think mysticism in its original intention is nothing bad... If correctly understood, it is like home-baked cookies. It is ridiculous because it's pointing out that reality is ridiculous. Its correct intention is trying to get our heads out of the box.

However pseudo-science on the other hand is entirely different thing.

 

[trend_guy]

personally i've never met a mechanical trader that makes his livingly solely from trading... i've met some discretionary traders that do, and i've associated with hundreds of full-time traders over the last 6 years.

my guess is once you've watched and traded the market for many years you start learning how to make high probability guesses. It's like anything else in that experience makes you better.

 

[martys]

Hi Brett,

I have a question about your observations. How do the discretionary traders established stop without any technical price point for reference? Do they just have absolute dollar stop? Or is it more of a feel thing again? Thanks.

I ask because I found superior entry technique leading to superior uncle points made the job easier for me. Without reference points, I am just lost.

Regards,
William

 

[steenbab]

Quote from martys:

Hi Brett,

I have a question about your observations. How do the discretionary traders established stop without any technical price point for reference? Do they just have absolute dollar stop? Or is it more of a feel thing again? Thanks.

I ask because I found superior entry technique leading to superior uncle points made the job easier for me. Without reference points, I am just lost.

Regards,
William

Great question. It really varies by trader. I'd say, as a whole, it's a function of the number of ticks they're willing to lose (Note: these are generally very short-term traders), but it's not a formal exit technique or formula. I would also say that the reference points for stops (when they are explicit) are not generally technical, at least in the usual sense of technical. A good trader might get out of a long trade, for example, because institutional traders have begun to sell the market or because a correlated market (bonds, oil, a key equity sector) has made a breakout in the wrong direction.

Your point about the value of reference points strikes me as right on the money. I'm not sure it matters greatly whether the reference point is price based or derived from other market information. The key is knowing when a market is making a normal, expectable movement against your position and when your position is just plain wrong.

 

[Maverick1]

Hi Brett

Read your book, appreciate your efforts. You seem to imply that the successful discretionary traders have a strong tape reading component to their 'discretionary' feel, which makes sense, especially if they are very short term traders. Other heuristics, such as crude, sox, bkx, eur, whatever else gives the guy some confidence are also something I have witnessed in successful traders' actions.

Yet,this discussion is unfortunately marred by semantics and biases. Take 'mechanical' for example. One can be very mechanical in the reading of tick, trin, breadth indicators etc, and trade 'mechanically' or at least partially, in a mechanical fashion off of those readings. To be more precise, when one describes a trader as 'mechanical', one still has to distinguish whether the 'mechanical' aspect of his trading is rooting in empirical observation (which would be heavily subject to small sample set defects and biases, for ex a momentum trader who no longer sees the wild swings or level II tricks that made him profitable but which have since disappeared), or whether the mechanical aspect is rooted in a firm understanding of microstructure, which is timeless and independent of market cycles.

Market microstructure is understood by only an extreme minority, who are able to exploit it to 'perpetuity', and this regardless of which cycle we are in, and assuming a threshold of 'tradable volatility', with decent range enough to make the efforts worthwhile. I believe your work on tick, volume, breadth etc is a good step in the exploration of microstructure, necessary but insufficient, (although I'm sure you've done a lot more work than the work that I know of from your book, only one chapter with any details on the Pinball methods), there is a lot more to microstructure than that, as I'm sure you already know and teach.

Regards
Maverick

Quote from steenbab:

I appreciate this thread regarding my articles and hope to make a few clarifications. As the quote from the initial posting indicated, I am not questioning that traders can trade successfully in a discretionary manner. In my work as a director of trading at a large Chicago proprietary firm I have directly observed quite a few multimillion dollar earning traders. None of them traded with technical analysis strategies, and none of them relied on research or mechanical systems. They truly were and are discretionary traders.

The problem, rather, is that such traders do not, as a rule, *maintain* their success. When market trends change, when patterns of volatility shift, their sensitive reading of the market no longer serves them well. I cannot tell you how many active traders I've observed who were successful during the momentum days of the late 90s and early 2000s, only to come to ruin in the past two years. My observation, as one who has directly observed them and worked with them, is that their problems are not primarily psychological. Instead, I believe it to be a problem of learning: patterns that were learned and internalized over many, many hours of market experience no longer show up in the market. By the time they have an opportunity to learn and internalize new patterns, they have experienced much loss and frustration.

Note that I am *not* advocating trading by mechanical systems. Those are based upon exploiting patterns that also will change with shifting market regimes. My experience tells me that discretionary trading can succeed when aided by research that allows a trader to know when market cycles are changing and when they can be counted upon for continuation. An analogy would be that of the fighter pilot, who relies on reflexes and the implicit learning that comes from long hours in simulations and real-time exercises, but who also must be guided by satellite intellligence, radar findings, instrument readings, and other "research".

The goal is not just to be successful, but to sustain success. I believe that can be most easily accomplished if hard, objective findings can tell the trader when recent market conditions can be counted upon and when they are changing. Such trading is neither wholly discretionary, nor mechanical. It is informed.

Thanks for the opportunity on the soapbox!

 

[Boy Plunger]

Quote from steenbab:

Great question. It really varies by trader. I'd say, as a whole, it's a function of the number of ticks they're willing to lose (Note: these are generally very short-term traders), but it's not a formal exit technique or formula. I would also say that the reference points for stops (when they are explicit) are not generally technical, at least in the usual sense of technical. A good trader might get out of a long trade, for example, because institutional traders have begun to sell the market or because a correlated market (bonds, oil, a key equity sector) has made a breakout in the wrong direction.

Your point about the value of reference points strikes me as right on the money. I'm not sure it matters greatly whether the reference point is price based or derived from other market information. The key is knowing when a market is making a normal, expectable movement against your position and when your position is just plain wrong.

A concise and accurate post.

My question is this; why do so many people want to emulate or find out about successful traders instead of becoming one themselves?

You cannot replicate another person or method of trading no matter how hard you may try, it is impossible to do without having some serious constraints in your trading. Learning about them may help you in your journey but it is no substitute for education and market experience. If you watch markets everyday for ten years and do not develop your own ideas and setups is this business really for you?

It was a lonesome road for me to get to the point where other people throw money at you b/c you have developed into a consistently profitable trader. Shady characters get wind and you best be able to move quickly....

You must have contempt for your peers during work hours and still maintain your sanity and humanity and love along with iron will power.


Just some thoughts .... again, i know that there are many ways to skin a cat but has anyone really skinned a cat in this lifetime?lol

Good trading to all...

 

[murray t turtle]

Quote from Cluseau:

Quote from BSAM:



I'm not a real smart guy,



Knowing this is half the battle.

Like home depot says, "you can do it, we can help."


You're going to take one guys explanation of a misappropriated word and then thank him for his definition and insight based on your perception of what he actually said? How unlike not a real smart guy.

In your trading, you must maintain a level of flexibility.

Still referring to trading operations as a plan is a sign of upcoming success. You can make vacation plans but not trading plans that stand the test of time.


In trading markets you need a good brain trained by making plans of attack that can be applied throughout perpetuity. The plans don't save you or make money, your brain does this instinctively once you have developed and are fluent in your data set. Then the magic can happen.

People who have trading "plans" have a limited amount of time before the markets send them packing. Also, they lack the confidence to use their minds constantly and train the brain beyond anything they can imagine. You think the greatest chess players come to play with a single plan that is all encompassing? Or do they first, possess a gift, then nurture it to become fluent in play? Most traders have plans and i do not want to offend but i must state my point of view however limited it may seem to some.

=================
Cluseau;
Interesting post;
you have planned not to make any ,apparently written plans.

Dont want to offend but weakest written plans are better than ;
strongest memory. Clear point, just dont agree.

Its not just things written down like different plans between uptrends & downtrends, but lots of important things like that.

And sure trends change, but if you are observant at all;
uptrends almost always usually DO NOT have similiar patterns equal to downtrends.

And since many of the best traders have ''senior moment memories'';
plans become more important as time marches on.


Wisdom is the principal thing.

 

[johngaltsaxe]

i am a very small minnow swimming with levithans but please allow me to voice my humble opine.

the key is systematic entries and discretionary exits. a system, once the initial order is triggered, MUST allow for changing market conditions minute by minute in order to absorb the max profit from the systematic entry. a systematic exit makes no sense due to the fluctuating dynamics of the market.

trade well,

jga

 

[iceman1]

Quote from kiwi_trader:

"I am not saying that it is impossible for the discretionary, active trader to achieve long-term success. Rather, my case is that, if only a small fraction of traders are highly successful in a single year and if only a fraction of those can sustain that success across market cycles that are averaging 2 years in duration, then the ideal glibly described in advertisements and magazines—“trading for a living”—is an anomaly, just as “golfing for a living” or “playing poker for a living” is the strict exception rather than the rule. Of course, it is not in the interest of brokerage houses, publishers of trading materials, trading software firms, or commercial trading gurus to publicize this perspective. I’m sure my stance on the matter makes me a kind of Howard Beale of the trading world. No matter; if the long-term successes at trading step forward with their account statements to prove me wrong, I will be only too happy to admit my madness."

"No amount of psychology will help a momentum trader from 1999 suddenly make the transition to selling strength in 2001, buying weakness in 2003, and then fading all momentum in 2005. It is like asking a devout Christian to become a Buddhist, then a Muslim, and then an atheist. The human mind does not shift its worldviews so readily—a fact that makes happy evolutionary success, but creates untold grief in trading."

Brett Steenbarger has a couple of interesting articles on his website about his observations on discretionary trading:

http://www.brettsteenbarger.com/Micropsychology Modeler.doc

http://www.brettsteenbarger.com/Micropsychology Modeler2.doc

no... only system traders can succeed!!

:eek: :eek:



Ice

 

[martys]

Quote from steenbab:

Great question. It really varies by trader. I'd say, as a whole, it's a function of the number of ticks they're willing to lose (Note: these are generally very short-term traders), but it's not a formal exit technique or formula. I would also say that the reference points for stops (when they are explicit) are not generally technical, at least in the usual sense of technical. A good trader might get out of a long trade, for example, because institutional traders have begun to sell the market or because a correlated market (bonds, oil, a key equity sector) has made a breakout in the wrong direction.

Your point about the value of reference points strikes me as right on the money. I'm not sure it matters greatly whether the reference point is price based or derived from other market information. The key is knowing when a market is making a normal, expectable movement against your position and when your position is just plain wrong.

Hi Brett,

Thank you for your clarification. Based on something I heard from Marty Schwartz in the Wall Street Uncut online interview... I made the adjustment that I am willing to exit (stop) when my entry is incorrect regardless whether the trade is correct or not. Personally this somewhat took the pressure off the decision process because I definitely know when my entry is incorrect... much easier than figuring out a trade is correct or not in real time. This only works along with good entry technique (separate from trade logic). It's kinda playing a head game with myself.

Regards,
William