Mechanical or Intuitive

[Privateer]

Hi,

the 62% Hitrate refers to all profitable trades ( after commissions ), regardless whether small or large.

On the bottomline, your estimate about the ratio of small gainers vs. small loosers is not very far from the truth.

Most shortterm trades ( intraday - 5 days holding ) average out a gain of 3% - 15% or a loss in the range 2 - 5%.
( I'm not a scalper and I trade fairly small positions of 100 - 300 shares / lot )
About 70% of all trades were in this timeframe. And I'm profitable with my shortterm trading.

Longterm trades, however, have been a different story in the past :
While some of the longterm trades ( several months ) gained 15% - 120%, some of the loosers in this category had to be closed on losses of up to 55% !
Unfortunately, in the beginning of my trading carrier, the looser positions were much larger than then the winners and it took quite some time and a number of profitable shortterm trades to offset those big losses.

That's why I said in previous post, it's much more important to have sound money-management and positionsizing strategies rather than having a great "trading-system".
You can spoil even the best "high expectancy-system" by applying poor money-management & positionsizing.

On the other hand, most of the shortterm trades I made during 2nd. half of 2000 and 2001 were support & resistance swings, combined with "reading" of market sentiment.
Not based on any technical-indicator signals like RSI, Stochastic, MACD etc.

But coupled with appropriate positionsizing and a reasonable stop-loss strategy, the majority of these trades were quite successful and the profits were much higher than the losses.

The "System" I use today is mix of some basic TA ( S&R zones ) + a lot of discretionary decisions based on "reading market sentiment".
I also concentrate my shortterm trading on only a handful of stocks and ETF's , rather than trying to find new trading candidates each and every day.

regards &

 

[jaan]

hi,

while i agree with most of the posters above, there's one point i have to disagree on:

Originally posted by vvv
would also add that every system is nevertheless discretionary in the sense that the money management part of your applied risk management utilised in determining your position size is always determined by the trader, and not the system.

and

Originally posted by Privateer
Why is that so ? because a system might signal you an entry, or an exit but it doesn't tell you, how much money to commit, which is the best entry / exit price and where to set the stops with regard to the underlyings volatility

this is not true. it is a well known mathematical fact that once you know (from backtesting) the probability-distribution of your P/L, calculating the optimum (either in terms of ROI only or ROI vs maximum drawdown) risk/size becomes a purely mechanical process. this can be proven using information theory. the keywords to search are: econophysics, shannon, risk, entropy.

- jaan

 

[vvv]

Originally posted by jaan
this is not true. it is a well known mathematical fact that once you know (from backtesting) the probability-distribution of your P/L, calculating the optimum (either in terms of ROI only or ROI vs maximum drawdown) risk/size becomes a purely mechanical process. this can be proven using information theory. the keywords to search are: econophysics, shannon, risk, entropy.

- jaan

ah, but that is the difference between theory in a perfect world vs a system applicable in an inferior real world, n'est ce pas?

as far as i'm aware the difference between a soso trader vs one of the very few immortals is the innate ability to knowing when you should really step on it vs reducing size, and not attempting to delegate that decision to an optimum based on backtesting. i agree with you that it can be done, but i disagree in the sense that it will not ensure outstanding results.

after all, if that were all that was needed then LTCM would hardly have busted up, not with the advantage of unlimited computing power and a couple of Nobel laureates to ensure sensible inputs that were supposed to generate a sensible output. didn't quite work, did it.

and practically no pure quant fund has managed a superior performance to say a discretionary louis bacon. the latter achieved an annualised return of 31% after costs and over a 10 year period with assets under management of up to USD 9,4 billion, with an equally outstanding sharpe ratio of 1.77.

cheers

 

[jaan]

Originally posted by vvv
ah, but that is the difference between theory in a perfect world vs a system applicable in an inferior real world, n'est ce pas?

not really. i can see that i did not make myself clear, so let me rephrase: a mechanical system is MUCH more effective in calculating optimum risk/size than predicting optimum exit/entry points.

i would never put forth a general claim that a mechanical system is better than discretionary one, i was just pointing out the error in the claim that risk/size cannot be calculated mechanically.

- jaan

 

[tntneo]

Originally posted by rtharp
What He recommends is for a trader to start with a fully mechanical system with certain rules which can be backtested. There are quite a # of profitable traders who are purely mechanical. The intuition comes after seeing the market for a long while and knowing when to alter the system or use a different system.

I think the thread is drifting a little. Although I enjoyed very much privateer's info regarding OT [I used the first version he mentioned several years ago, and went into the same trouble].

RTharp really got to the point. It makes sense, it relates to what I also experienced. Anyone starting should pay attention to these words. Of course, I must also add what Privateer mentioned regarding money/risk manament and position sizing. This is no stranger to Tharp of course [read the book.. twice!].

neo

 

[rtharp]

I'll add someting else.


Brian June and Dr. Tharp coached me for awhile. One of their big things was for me to have written rules and a business plan. It was exactly what I didn't want to do. I felt it was very restricting.

My experience was exactly the opposite. It allowed me to clearly define what high probabilty entries work for me. I'm still a very discretionary trader but have rules now when to not enter trades which has heavily decreased losses.

rtharp

 

[earlyapexer]

No matter what system you use, as everyone has different time frames and personalities, you must manage your positions wisely. Market conditions are constantly changing, therefore it is not just using stop losses, but managing the size of your positions in relation to your exposure to risk.

 

[tymjr]

rtharp: "He recommends a trader start with a fully mechanical system with certain rules which can be backtested. The intuition comes after seeing the market for a long while and knowing when to alter the system or use a different system.

One of their big things was for me to have written rules and a business plan. It was exactly what I didn't want to do. I felt it was very restricting. My experience was exactly the opposite. It allowed me to clearly define what high probabilty entries work for me."

I agree with tntneo. This is powerful stuff for traders. VERY powerful.