Risk management and odds
- Thread starter NKNY
- Start date
i use a 100% mechanical system, where i have a custom piece of software for both backtesting and trading. i'm not going to argue whether it is superior to discretionary trading or not, but one very important thing to note is that having a computer trade for me takes away 90% of the stress and psychological problems related to responsibility, because i never have to "live with my lousy decisions" and i always know that the trading decisions are made on rational basis.
- jaan
Jaan,
There is no one way to trade, but complete rationality is not how the market works, there is slippage involved, and thats where automatic systems require some sort of human intervention. Without human intervention, an automatic signal might look like a good point to enter when in reality it is a setup by a specialsit or a market maker. Computers are great in many ways, but they cannot take into consider the chaos of the way in which at times there is slippage and when there is not any. Even the greatest computer program can't give you a 100 percent accurate signal to buy or sell.
There is no one way to trade, but complete rationality is not how the market works, there is slippage involved, and thats where automatic systems require some sort of human intervention. Without human intervention, an automatic signal might look like a good point to enter when in reality it is a setup by a specialsit or a market maker. Computers are great in many ways, but they cannot take into consider the chaos of the way in which at times there is slippage and when there is not any. Even the greatest computer program can't give you a 100 percent accurate signal to buy or sell.
Zarrar,
Automated systems do not seek 100% accuracy. That's the point most people missed on several threads about this subject.
No trading should seek 100% accuracy, this is a myth and can not be achieved imo.
However, automated systems work and are used everyday.
You are right about the slippage. There are ways to limit it [using the right trading platform, data feed, time frame, etc]. But it is not possible to remove it. Worse, it is not possible to really remove all human intervention. The market can and will spike sometimes. I still remember the Feds rate cut while most were caught short.
Tell me about slippage !
Again, the goal of automated systems is often misunderstood. The goal is to help trading, not to replace traders [systems which works are often systems built specifically for a trader or a firm]. It is a kind of super assistant. And yes, sometimes it can do 90% of the work or more, and there will be these times when you choose to deactivate it, just as a human trader decides sometimes it is not worth to be beaten.
So no holygrail here. Newbies forget about buying the 'winning software system'. Forget about the easy road. Trading is tough, no software you can buy publicly will make it easy.
Learn about the market, practice, practice, practice, prepare a lot of money you gonna loose [your learning fee]. And one day, when you can make money on a constant base, then you will be ready to have an automated assistant or system. That's the paradox, it does not work the other way around !
vpiNeo
Automated systems do not seek 100% accuracy. That's the point most people missed on several threads about this subject.
No trading should seek 100% accuracy, this is a myth and can not be achieved imo.
However, automated systems work and are used everyday.
You are right about the slippage. There are ways to limit it [using the right trading platform, data feed, time frame, etc]. But it is not possible to remove it. Worse, it is not possible to really remove all human intervention. The market can and will spike sometimes. I still remember the Feds rate cut while most were caught short.
Tell me about slippage !
Again, the goal of automated systems is often misunderstood. The goal is to help trading, not to replace traders [systems which works are often systems built specifically for a trader or a firm]. It is a kind of super assistant. And yes, sometimes it can do 90% of the work or more, and there will be these times when you choose to deactivate it, just as a human trader decides sometimes it is not worth to be beaten.
So no holygrail here. Newbies forget about buying the 'winning software system'. Forget about the easy road. Trading is tough, no software you can buy publicly will make it easy.
Learn about the market, practice, practice, practice, prepare a lot of money you gonna loose [your learning fee]. And one day, when you can make money on a constant base, then you will be ready to have an automated assistant or system. That's the paradox, it does not work the other way around !
vpiNeo
I guess it shouldnât surprise me anymore, but I'm still shocked by the need to polarize the issue of trading methodologies. System trading vs. discretionary trading. In reality this is a false dichotomy. The lines are blurred. It is more a spectrum than an exact line of demarcation? You say potato, I say patatoe. The reality is that everyone develops a system that they work religiously until revision is necessary. The labels only serve to help each of us understand where another trader may be focusing the majority of his attention.
As others have pointed out before me, the purpose of system development is not necessarily to create infallibility. Most developers simply seek to create a form of trade management that results in profits. The same applies to the development of indicators. Infallibility is rarely, if ever, the goal. You may use the pattern of a specialist as an indicator or you may use a complex equation. Depending on the circumstances, both seek to exploit a perceived opportunity. Any indicator is, of course, hopelessly dependent on a system's trade management parameters to achieve profitability.
Having worked with or been exposed to successful practitioners of one, both, are some hybrid of the two; I can say that automated trading and discretionary trading (i.e. that which contains variables that are hard to quantify in a programmable fashion) are both viable and profitable. Absolutely!
For some, automation helps to limit the impact of emotion and lack of discipline that in many cases affects profits negatively. For others, these issues are non-issues and they function quite well as active participants under pressure.
As, no doubt, you are all tired of hearing me say, I believe most newer traders would benefit from writing down a rigid, mechanical plan and working from there. Thus, they are limiting the influence of certain beliefs or habits that can destroy an account. As experience is acquired, one can choose to experiment with a more nuaced and discretionary understanding.
If you've gotten this far, thanks for listening to my pleonastic rant.
As others have pointed out before me, the purpose of system development is not necessarily to create infallibility. Most developers simply seek to create a form of trade management that results in profits. The same applies to the development of indicators. Infallibility is rarely, if ever, the goal. You may use the pattern of a specialist as an indicator or you may use a complex equation. Depending on the circumstances, both seek to exploit a perceived opportunity. Any indicator is, of course, hopelessly dependent on a system's trade management parameters to achieve profitability.
Having worked with or been exposed to successful practitioners of one, both, are some hybrid of the two; I can say that automated trading and discretionary trading (i.e. that which contains variables that are hard to quantify in a programmable fashion) are both viable and profitable. Absolutely!
For some, automation helps to limit the impact of emotion and lack of discipline that in many cases affects profits negatively. For others, these issues are non-issues and they function quite well as active participants under pressure.
As, no doubt, you are all tired of hearing me say, I believe most newer traders would benefit from writing down a rigid, mechanical plan and working from there. Thus, they are limiting the influence of certain beliefs or habits that can destroy an account. As experience is acquired, one can choose to experiment with a more nuaced and discretionary understanding.
If you've gotten this far, thanks for listening to my pleonastic rant.
as tntneo already pointed out, nobody should be after 100% accurate signal. instead, positive expectancy is what we should be after.
also, re slippage: it is really trivial to account for in a simulation. again, remember, the simulation does not have to calculate the exact slippage for each simulated trade, but estimate the AVERAGE slippage over 1000's of trades.
if tradestation & metastock don't do that, then i'm happy to hear that my simulation is more accurate
- jaan
These are all very good points and very valid. Automation is essential to lead one to the actual point where it is possible to make a decision. As said by many, it is the combination of both methods that yields the greatest expected outcome. By all means I am in no way denouncing automation, nor pushing discretionary methods. This has been a great discussion with some very talented minds, and it has been a great learning experience.