Is Discretionary Trading Undervalued?

Discussions about personal psychology for the individual trader.
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Dean Hoffman
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Is Discretionary Trading Undervalued?

Post by Dean Hoffman » Fri Jan 27, 2006 3:06 pm

Recently I have noticed very minor aspects of discretion creeping into my trading perspective. As a one time “dyed in the woolâ€
Last edited by Dean Hoffman on Fri Jan 27, 2006 3:38 pm, edited 1 time in total.

dave3076
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Post by dave3076 » Fri Jan 27, 2006 3:31 pm

I totally agree with you. I have just added to your last thread involving dynamic portfolio theory in which i began touching on this very subject. It would be interesting to hear your comments on that Dean. Thanks.

Paul King
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Post by Paul King » Fri Jan 27, 2006 3:31 pm

Dean,

I am in year 4 of my full-time trading journey and I started with the intention of being 100% mechanical. As each year has gone by I have introduced some discretionary components into my trading in cases where it is impossible to 'program the rules' I am using.

My favorite analogy is a chess computer versus a human chess Grandmaster. When one is inexperienced and unskilled, it is always better to take the move suggested by the computer, it is only after many hours/years of study and practice that you could come up with better moves a significant percentage of the time and actually achieve better results than simply taking the moves the computer suggested.

I too, believe that it is possible to make money with 100% mechanical systems, and that in general any deviation from your system when you are inexperienced will have a negative impact overall, but also that a good mechanical system + some discretion based on experience will improve your results.

Paul

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Post by sluggo » Fri Jan 27, 2006 4:31 pm

Taken from http://www.elitetrader.com/vb/showthrea ... post887914
If you're a professional money manager, the "best" thing to do is say you're a discretionary trader, even if you in fact religiously follow a 100% mechanical system. Why? Because asset allocators and fund-of-funds people, demand tons and tons and TONS of information from system traders, their "due diligence" never ends. They want to test your system for non-correlation with other system traders they've given money to. They want to calculate jillions of statistics about your past performance. They want to fiddle with your system.

On the other hand, if you say "I am a skilled discretionary trader, I trade based on my highly developed sense of the market, and my track record shows I have been very successful," they can't really pester you to death. Give them your track record, smile most sincerely, and say "well are you going to trust me, or not?"

Saves lots of time and avoids plenty of grief.

Dean Hoffman
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Post by Dean Hoffman » Fri Jan 27, 2006 5:09 pm

Sluggo, I got a good chuckle out of that one. I’ve seen it too; there are those who are not satisfied until they’ve got a redwoods tree supply of unfocused (in many cases irrelevant and meaningless) paper and data. Then, if they are finally able to make a decision (usually not) they find that the manager’s correlation and performance ends up different the next year than the previous 20 anyway! I got a kick out of Jack Schwager’s idea to ban past performance numbers in a CTA’s document. What was his rational you ask??? He thought it was misleading and implied to investors that the CFTC thought it was relevant to future performance, yet his data showed it was not! The only empirical data that he found was that peer group ranking tended to have predictive value. (You can read this in his book about managed futures, link below):

( http://www.amazon.com/gp/product/047102 ... e&n=283155 )

If you truly are a good trader with a good track record, at the end of the day they really are trusting YOU and not your system (even if you’re a system trader). After all, they still need to trust YOU to follow that system, and if your track record is good, you probably do (we know plenty of people will lose money trading a profitable system.) Quite frankly, you’ve probably saved them from a mountain of self defeating analysis-paralysis!

However that aside, I hope the thread stays focused on the relative value, or lack thereof of discretionary aspects.
Last edited by Dean Hoffman on Fri Jan 27, 2006 5:14 pm, edited 1 time in total.

kianti
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Post by kianti » Fri Jan 27, 2006 5:12 pm

sluggo wrote:Because asset allocators and fund-of-funds people, demand tons and tons and TONS of information from system traders, their "due diligence" never ends. They want to test your system for non-correlation with other system traders they've given money to. They want to calculate jillions of statistics about your past performance. They want to fiddle with your system.
Wow :shock: , that's exactly what I'm asked to do right now :shock: :shock: The most annoying thing is the past non-correlation!?!

Thanks

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Post by TrendMonkey » Fri Jan 27, 2006 7:24 pm

That book you linked to above (Schwager's Managed Trading) is truly wonderful. I picked it up recently on another forum member's recommendation. One of my favorite five of all the trading books I own!

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