Can completely discretionary traders every succeed?

[Holmes]

Quote from steenbab:

I'm afraid those changing market cycles affect systems as well as discretionary traders, so successful system traders end up remodeling the markets just as successful discretionary traders end up changing their game. I have to say that I've only worked with two traders (out of perhaps 200; both completely discretionary) who I'm confident could adapt to just about any changing market conditions. And even they have experienced meaningful drawdowns during the market's shifts. They have very different personalities, skill sets, and trading styles: one is a passionate market junkie and has a magnificent feel for momentum shifts; the other is cold as ice and reads patterns in the market that leave your jaw hanging. The two have taught me that a single formula for success is not to be found. The common denominator, if there is one, is a complete absorption in the market that allows them to internalize patterns that are not apparent to others. Interestingly, and apropos of the couple of the recent posts, both traders are probably more structured in their entries than exits--though in different ways.

Respectfully disagree.

The basic human fear ( and greed is another form of fear: fear to "miss the boat" ) and manipulation are not changing during the ages. Impatience is another human trait that plays an important role.

IF you understand what moves the markets AND have the ability to "visualize" it then there is little need to adapt. You either trend trade or counter trade (depending on conditions) and when conditions are not clear you stay flat.

My "setup" (i.e. decision making process) has not changed in a long time and it used exactly the same from weekly "bars" (timeframe) all the way down to double digit tick "bars".

Sherlock

 

[Maverick1]

Quote from steenbab:

Very interesting post, Maverick. I agree that microstructure is only understood by a few, but I'm curious about your assertion that microstructure is unchanging and can be traded in perpetuity. That is not at all my experience. Those market makers trading microstructure (the market's basic order flow) report great changes in their trading (and their P/L) as a function of the much larger size in the ES book, decimalization of the equities, etc. Are we once again at a semantic loggerjam?

I'm afraid we are...

I probably should not have used the term 'microstructure', because you correctly interpreted it as order flow at the core, but that is definitely not what I had in mind.

In my perceptual filter, I most definitely pay attention to the tape, that is size on bid, on ask, volume, last trade, volume on last trade, momentum of the tape etc, etc. But that is only one tool imho, among many others, that I find helps one better understand what I had earlier called microstructure, but maybe what I should call 'market behavior'...

I believe that market behavior is repetitive, hence some of the discoveries you made for ex, on tick, trin, volume, among other evidence that bear this fact out. One may have a very vague sense of the repetition in any market's price action from empirical observation, but being able to quantify and recognize the various stratas of repetitious behavior takes relentless, I would say ferocious resolve to process reams of data and then put the 'jigsaw' pieces together to see the big picture. Even more importantly, it requires a 'maverick' approach to everything that is taught in books, in that one has to read, digest, process, then transform and transcend the tools that are taught. This process involves discarding stale schools of thought obviously, but also a lot of rethinking and reworking of classic tools that can prove invaluable in an original and reworked format. The best analogy, cheesy or not, is Bruce Lee's Jeet Kune Do. It was the style that was no style, since it was all styles at once. Lee incorporated the jab and footwork from boxing, the kicks from Kungfu, blocks from Karate, throws from JuJitsu, among many other techniques, into his 'style' if you want to call it that. Closer to home, I think that is why Gann once recommended 'using all the tools, all the time'. (note, this is not an endorsement of Gann...) Using all the tools, does not necessarily mean use all the tools the way they are taught in a $19.99 book on online trading. But you understand what I mean.

Breadth indicators, the kind you have talked about in your book are part of the information set that allows one to understand where we are in what I call the 'cycle of price action', but they are only a subset of that much larger information set which also includes tape reading or market microstructure proper. Note that the larger successful hedge funds also incorporate a lot of fundamental data into that information set.

As ET poster Murray Turtle would say and has said on this thread, "Wisdom is the principal thing". To me, at a very basic and practical level, wisdom in trading is knowing what the 'right side' of the market is. The ability to know immediately if your trade is on the 'right side', and has all the probabillities lined up behind it or not.

The 2 traders you describe have reached a very intimate level of understanding in the market via tape reading among other things. I am agnostic as to whether they also have the larger understanding of the cycle of price action, but I don't think it really matters in their case, unless they are still unsatisfied with their current success. I am sure many would like to have their P&L.

I am also intrigued at your observation that you have rarely if ever met any traders who are successful and use 'classic' indicators or heuristics in their trading such as averages, oscillators etc. Has this been a constant across your career? The reason I ask is because it seems to contradict what I've read in the Schwager books, and also from personal contact with large hedge funds, many of whom are closet technicians but will not admit it (with a few notable exceptions such as Paul Tudor Jones, Bruce Kovner etc)

Regards
Mav

 

[nzbryant]

Quote from steenbab:

They do not make extensive use of charts at all, and they do not follow common oscillators, indicators, etc. I'd say they're looking more at volume and how it's flowing in and out of the market

Thanks for your posts. Re: above, are you saying they mainly look at DOM? What kind of hold times do they have on average - minute to minute or day to day?

 

[areyoukidding?]

Quote from steenbab:

Thanks; you're one step ahead of me. My topic for this weekend's article is precisely what you're writing about: how researching the market is not only a way for gaining an intuitive feel for trading patterns, but is also a way of adapting that feel to changing market conditions. Discretionary and automated trading are generally presented as opposite ends of a trading style continuum, but I suspect it's valuable to think outside that box. By reviewing past markets that are statistically similar to the present market, we can continuously update our market feel and make the implicit learning ongoing.

As to qualities shared by the successful traders I've worked with, I'd say that their cognitive strengths are more apparent than any personality similarities. Speed of mental processing and a capacity for prolonged, intense concentration stand out in my direct observation of their trading. Rookie traders and less talented ones do a lot of conscious reflecting on the market: what it's doing now, what it might do, etc. I don't find that kind of inner dialogue with these successful traders, and if does manifest itself, it's almost surely a sign that they're not trading well. This may sound strange, but they seem to experience the market viscerally, almost the way a great dancer would experience music on a dance floor: very sensitive to shifts in rhythm and tone.

Another common feature is that they look at unusual data in making trading decisions (although they look at different data). They do not make extensive use of charts at all, and they do not follow common oscillators, indicators, etc. I'd say they're looking more at volume and how it's flowing in and out of the market; where it slows down; what the market does when it picks up; etc. My sense is that they spend so much intense time concentrating on every market transaction that they have developed an acute feel for when volume flows normally and abnormally and can adjust their trading rapidly in response.

That is not to say that there aren't other ways of trading that might be successful. The traders I'm mentioning have extremely different trading styles: different time frames, sizes, and ways of entering and exiting positions. Others may have yet different market approaches. My hunch, however, is that some of these cognitive skills may be common to many successful intuitive traders.

This guy talks a lot, but isnt saying anything...save your money.

Know Yourself.

 

[easyrider]

I think I can honestly say that the market has never "shifted" for me and Ive been at it since March 2000. I do not pay much attention to anything beyond the 5 min. emini charts and day in day out the market goes through its gyrations and basically its the same thing day after day. It goes up for awhile and then down for awhile making its little patterns as it goes. Samo samo.

 

[wdscott]

Quote from easyrider:

I think I can honestly say that the market has never "shifted" for me and Ive been at it since March 2000. I do not pay much attention to anything beyond the 5 min. emini charts and day in day out the market goes through its gyrations and basically its the same thing day after day. It goes up for awhile and then down for awhile making its little patterns as it goes. Samo samo.

Agreed.

Day after day the same patterns and same set-ups. Nothing has changed since I learned how to trade.

Dave

 

[libertad]

wdscott wrote:

Agreed.

Day after day the same patterns and same set-ups. Nothing has changed since I learned how to trade.

Dave

................................................................................

Same here...

 

[steenbab]

Quote from Maverick1:

I am also intrigued at your observation that you have rarely if ever met any traders who are successful and use 'classic' indicators or heuristics in their trading such as averages, oscillators etc. Has this been a constant across your career? The reason I ask is because it seems to contradict what I've read in the Schwager books, and also from personal contact with large hedge funds, many of whom are closet technicians but will not admit it (with a few notable exceptions such as Paul Tudor Jones, Bruce Kovner etc)

Mav [/B]

Yes, I'd say this has been a constant, although it might be an artifact of the kinds of traders I tend to work with: market makers/scalpers/very short-term traders. And it is certainly a possibility that my sensitivity to changing markets reflects shifts that have occurred at the DOM level as the result of vastly expanded size in the book and the migration of much institutional trading away from the floor and onto the screen.

I have researched common technical setups, such as moving average crossovers, N-bar highs/lows, breakouts, etc and don't doubt that such setups continue to occur from one market period to the next. What have changed are the expectations following such setups. If you look at the average move following a given entry signal during the late 90s, from 2000-early 2003, and from early 2003-present, you'll see very different means and standard deviations. These reflect the changes in trend and volatility from one market period to the next, and they determine not only the % accuracy of the setup, but also the expectable gain/loss.

My best assessment is that successful technical traders sense these shifts and adjust for them with superior order execution, changes in holding times, and/or adjustments in position sizing/risk management. FWIW, I find that traders focus much more on their setups than their position management, even though the latter is arguably just as important--if not more--to their P/L. It is quite possible that a good trader could successfully trade the same setup in changing markets by altering his/her position management. That would account for how successful traders could experience the market as not changing, even when statistical criteria suggest significant change.

I appreciate the many interesting and thought-provoking comments both on and off this forum.

 

[cornholetrading]

I was wondering if the majority of the traders you worked with were of the short term scalping nature. To me it seems those types of traders can be extremely successful as long as the market condition they have learned continue. Being so short term in nature these traders seem to be able to exploit many of the micro moves throughout the day with the good ones raking in huge numbers consistently. However from what I have seen they are also the first ones effected when things change as their edge is the smallest and are most easily effected by the market changes where they go from making money all the time to barely at all. Although it is difficult for many traders to adjust to the changing markets from what I have seen many traders that strictly relied on reading the DOM or reading level 2 seem to be some of the traders that have the most difficult time adjusting. Maybe this is because the patterns they internalized might never reappear again in a market as the market gains liquidity and as other players come in the market that effect when volume and orders hit the market. If this is the case then they have to totally relearn and internalize new patterns which takes time.

 

[Maverick1]

Thank you for recognizing that your surroundings may affect your conclusions. I think there is so much more to the market than the very short term, if one digs deep enough. But hey, we're all in this for the money, so who cares if its short term or the TOE (theory of everything), as long as it grinds out the cash,

I think that the one obvious 'change' has been the decline in average true range/volatility in all time frames, across the periods you mentioned. Why this is not anticipated or was not recognized by many traders remains a mystery to me, simply because casual observation of any chart will show that an expansion in volatility leads to a contraction, and I wonder why one would think that be any different for the indices as a whole following the bubble burst. If you look at the ATR characteristics of the mid 90s period, they are not that different from the current environment... we have simply reverting to more 'normal' range/volume in daily market fluctuations.

IMHO, shrinking volatility does not invalidate market behavior, it simply compresses it. Which is why I argued earlier that traders who have understood the cycle of price action need a threshold level of volatility to operate, which I think is just fine in the current market. And I agree 100% with you that position sizing allows the informed trader to adjust to that compression accordingly. But his success is contingent on knowing how to be on the right side of the market no matter the current market trend/cycle. Sizing, adding to positions, cutting loss, all that is on equal footing with correct positioning. I see the two as the sides of coin, they go together.

Common setups should lead to common/average results by definition. I always have a good laugh when I pick up the trader magazines and see someone who 'backtests' the RSI, for ex, and finds that 'it doesn't work'. I wish we would worry more about the power of our tests and the formulation of our hypotheses before rushing to conclusions to reject the null. In simple terms, you can't solve a problem/answer a question if you haven't precisely defined it. Since we know that there are as many definitions of 'technical' methods/systems as there are traders, I'm afraid we are looking at hypotheses that cannot be falsified (when it comes to a sweeping conclusions regarding the validiity of Technical Analysis, in all its complexity), and hence cannot be discussed without a healthy dose of agnosticism.

Many thanks for your replies
All the Best in your research and trading,
Maverick

Quote from steenbab:

Yes, I'd say this has been a constant, although it might be an artifact of the kinds of traders I tend to work with: market makers/scalpers/very short-term traders. And it is certainly a possibility that my sensitivity to changing markets reflects shifts that have occurred at the DOM level as the result of vastly expanded size in the book and the migration of much institutional trading away from the floor and onto the screen.

I have researched common technical setups, such as moving average crossovers, N-bar highs/lows, breakouts, etc and don't doubt that such setups continue to occur from one market period to the next. What have changed are the expectations following such setups. If you look at the average move following a given entry signal during the late 90s, from 2000-early 2003, and from early 2003-present, you'll see very different means and standard deviations. These reflect the changes in trend and volatility from one market period to the next, and they determine not only the % accuracy of the setup, but also the expectable gain/loss.

My best assessment is that successful technical traders sense these shifts and adjust for them with superior order execution, changes in holding times, and/or adjustments in position sizing/risk management. FWIW, I find that traders focus much more on their setups than their position management, even though the latter is arguably just as important--if not more--to their P/L. It is quite possible that a good trader could successfully trade the same setup in changing markets by altering his/her position management. That would account for how successful traders could experience the market as not changing, even when statistical criteria suggest significant change.

I appreciate the many interesting and thought-provoking comments both on and off this forum.