Can Trading Edges be Quantified?
- Thread starter InTheZone
- Start date
Well, I think on average mechanical traders are "inferior" to discretionary traders. Note I'm only talking about successful traders. By inferior I mean, an average successful discretionary trader produces much better returns than a mechanical trader. Look at all the CTAs, like 90% of them are mechanical, and their returns plain suck ( and no I don't think it's because of their size, they all suck, big and small). Also look at the absolute number of successful non-institutional traders... what % of them is purely mechanical? Very small. The % is much higher among institutions, ie. CTAs but then again as I said CTA returns suck.
TraderKay:
IMO, successful professional traders have already internalized the position management rules, and therefore do not need a mechanical system (although, there are some professional traders that swear by their proprietary systems).
I believe that position management lends itself well to a mechanical approach (the decision would be solely the trader's preference). I also believe that trader's who do not fall into your definition of successful would benefit the most.
As to whether each of us individually would benefit could easily be determined by comparing our discretionary trading results with the mechanical approach using the same basket of stocks over the same period. Some of the stats to consider would be: Net return, profit factor, largest drawdown (MAE), etc..
I think we are both in complete agreement with regard to stock selection being discretionary (this is where the focus is for most mechanical systems, and the reason for their poor performance).
Anyway, I think we can agree to disagree.
--Ron
IMO, successful professional traders have already internalized the position management rules, and therefore do not need a mechanical system (although, there are some professional traders that swear by their proprietary systems).
I believe that position management lends itself well to a mechanical approach (the decision would be solely the trader's preference). I also believe that trader's who do not fall into your definition of successful would benefit the most.
As to whether each of us individually would benefit could easily be determined by comparing our discretionary trading results with the mechanical approach using the same basket of stocks over the same period. Some of the stats to consider would be: Net return, profit factor, largest drawdown (MAE), etc..
I think we are both in complete agreement with regard to stock selection being discretionary (this is where the focus is for most mechanical systems, and the reason for their poor performance).
Anyway, I think we can agree to disagree.
--Ron
Interesting thread...
I would agree that many of the returns that CTA's return are really inferior to what a very good experienced discretionary trader will earn...But, then at the same time, you have to distinguish the two objectives...For a CTA, his "gravy train" is assets under management and therefore his portfolio will always be DE leveraged so as not to increase the volatility of the account...If you notice, the guys who get the most assets have the most boring returns...They are almost running a "money market" fund...That is trading as a money management business and, to be honest, I find very little of value from their techniques and methodologies...
The best traders are the proprietary and discretionary traders...However, we very rarely hear about them because they are not in the business of marketing themselves or their returns...But either way, I find that they have an incredible "arsenal" or tricks and techniques for minimizing drawdown and increasing leverage when they are right...That is the stuff that always interests me...Whether it be the way they scale into positions or hedge their positions, or scale out of losing positions, these are the techniques used by "survivors" not by the slick, Armani suits who sit behind a desk and run a mechanical system on a 400 million dollar portfolio of derivatives...These guys get alot of press, but what can really be learned from guys who are just trying to minimize drawdown and manage a huge portfolio...Some will disagree with me, but I would like for someone to tell me what "tricks" these guys use that any of us can use...
I would agree that many of the returns that CTA's return are really inferior to what a very good experienced discretionary trader will earn...But, then at the same time, you have to distinguish the two objectives...For a CTA, his "gravy train" is assets under management and therefore his portfolio will always be DE leveraged so as not to increase the volatility of the account...If you notice, the guys who get the most assets have the most boring returns...They are almost running a "money market" fund...That is trading as a money management business and, to be honest, I find very little of value from their techniques and methodologies...
The best traders are the proprietary and discretionary traders...However, we very rarely hear about them because they are not in the business of marketing themselves or their returns...But either way, I find that they have an incredible "arsenal" or tricks and techniques for minimizing drawdown and increasing leverage when they are right...That is the stuff that always interests me...Whether it be the way they scale into positions or hedge their positions, or scale out of losing positions, these are the techniques used by "survivors" not by the slick, Armani suits who sit behind a desk and run a mechanical system on a 400 million dollar portfolio of derivatives...These guys get alot of press, but what can really be learned from guys who are just trying to minimize drawdown and manage a huge portfolio...Some will disagree with me, but I would like for someone to tell me what "tricks" these guys use that any of us can use...
I agree that trade management is a HUGE aspect of trading and the one that you only really appreciate when you get past all of the gobblygook of trying to tweak indicators, patterns, etc, etc...The ability to minimize the losses and maximize the winners is far more of an art than a science...I do not even understand how someone could actually "program" the amount of exposure one would have to a series of different path excursions...This is like trying to take "black box" mentality and applying it to the most discretionary aspect of trading, and in truth, the aspect of trading that separates the mediocre from the giants in the business...
One of the more interesting interviews in Market Wizards(I hate to bring this book up cause it seems really hackneyed), but was the interview with McKay where he said he varied the position size on a scale of 50x...That is where the actual leverage comes into play...No system can tell a great trader how much size to trade in any given scenario...Having huge exposure to a very trending move that never puts any pressure on the first entry is the definition of maximizing the winners...How many traders trade minimal size take their small profits, then miss the rest of the move...Or even worse, put on small size at the best possible entry, take it off, re-enter with twice the size and stop out for a net loss on the two positions...This happens all the time...Yet they should have been in the trade only once and pairing in, pairing out for the duration of the move...
These are the aspects of trading very few talk about...This is the stuff that makes all the difference in the world...
One of the more interesting interviews in Market Wizards(I hate to bring this book up cause it seems really hackneyed), but was the interview with McKay where he said he varied the position size on a scale of 50x...That is where the actual leverage comes into play...No system can tell a great trader how much size to trade in any given scenario...Having huge exposure to a very trending move that never puts any pressure on the first entry is the definition of maximizing the winners...How many traders trade minimal size take their small profits, then miss the rest of the move...Or even worse, put on small size at the best possible entry, take it off, re-enter with twice the size and stop out for a net loss on the two positions...This happens all the time...Yet they should have been in the trade only once and pairing in, pairing out for the duration of the move...
These are the aspects of trading very few talk about...This is the stuff that makes all the difference in the world...
def
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going back to Don's quote and some of the other comments . There are many mechanical or automated systems that work. the reason you don't hear too much about them are that the ones that work often cost multi-million dollars to delvelop/operate and are often not publicized. I for one can attest that there are some automated systems that have been extremely successful.
Vulture:
I'm with you on this. It is much more worthwhile to understand and learn the techniques of the 'survivor'.
Scaling into a trade is something I'm working on now. It makes a tremendous improvement to the bottom line with little additional risk. However, I find it difficult to be agressive in this area. Here is where a mechanical system might be of help (to me, anyway).
Exploring the various position management techniques is where a mechanical system would be of real value, IMO.
Food for thought!
I'm with you on this. It is much more worthwhile to understand and learn the techniques of the 'survivor'.
Scaling into a trade is something I'm working on now. It makes a tremendous improvement to the bottom line with little additional risk. However, I find it difficult to be agressive in this area. Here is where a mechanical system might be of help (to me, anyway).
Exploring the various position management techniques is where a mechanical system would be of real value, IMO.
Food for thought!
RonB:
yes, this is a very "meaty" discussion...This is the stuff that we have to deal with everyday...For instance, what happens when the security or future you are trading breaks out higher or lower and you cannot get into the position right away...You have a signal to go long or short, but you are pretty certain that your entry at point A may be a bit early or late...you want the exposure to the move, should it resume its original trend, but you are also concerned about the retrace backwards...
That is where the scale has to be explored...I deal with this stuff all the time myself...The key is to have enough "bullets" to be able to ensure some exposure for the move should it resume and you are able to "pair out" without reducing your exposure to 0 again and dealing with the same dillema...
At the same time, if your first entry is a bit early and it retraces another x points against you, how do you increase your exposure ie(price improvement) and, at what point are you wrong...As I have gained more experience in this area of trading I find that alot of the trades that I enter(if I am late and miss the perfect entry) require that I actually add to an initially losing position so as to give me a bit better price, with the objective of establishing a position in a "range" and then pairing out when the trend resumes...
btw, I exclusively trade the es futures, so this might not be as applicable to equities...
yes, this is a very "meaty" discussion...This is the stuff that we have to deal with everyday...For instance, what happens when the security or future you are trading breaks out higher or lower and you cannot get into the position right away...You have a signal to go long or short, but you are pretty certain that your entry at point A may be a bit early or late...you want the exposure to the move, should it resume its original trend, but you are also concerned about the retrace backwards...
That is where the scale has to be explored...I deal with this stuff all the time myself...The key is to have enough "bullets" to be able to ensure some exposure for the move should it resume and you are able to "pair out" without reducing your exposure to 0 again and dealing with the same dillema...
At the same time, if your first entry is a bit early and it retraces another x points against you, how do you increase your exposure ie(price improvement) and, at what point are you wrong...As I have gained more experience in this area of trading I find that alot of the trades that I enter(if I am late and miss the perfect entry) require that I actually add to an initially losing position so as to give me a bit better price, with the objective of establishing a position in a "range" and then pairing out when the trend resumes...
btw, I exclusively trade the es futures, so this might not be as applicable to equities...
Vulture, et al:
I agree that most successful traders (survivors) are discretionary; and it would certainly be difficult to program all aspects of their position (trade) management techniques.
However, the majority of traders do NOT fall within this category, and are still low on the learning curve. Mechanical systems have their place, and it's primarily with this latter group.
If I wanted to apply a tool that would assist a trader in learning to become successful (and eventually fully discretionary), I would start with the basics for position management that are easily programmed. This would help learning traders (like me) to develop our skills more quickly (and to avoid the 'dues' that many in Market Wizards paid to reach their current level).
I agree that most successful traders (survivors) are discretionary; and it would certainly be difficult to program all aspects of their position (trade) management techniques.
However, the majority of traders do NOT fall within this category, and are still low on the learning curve. Mechanical systems have their place, and it's primarily with this latter group.
If I wanted to apply a tool that would assist a trader in learning to become successful (and eventually fully discretionary), I would start with the basics for position management that are easily programmed. This would help learning traders (like me) to develop our skills more quickly (and to avoid the 'dues' that many in Market Wizards paid to reach their current level).