Death of Discretionary Traders??

[ant 10]

Thanks Reaver. I also read both of Chick Goslin's books and thought they were quite good. I still use the 3/10/16 oscillator to gauge momentum, but more in the way that Linda Raschke uses it.

[Reaver 10]

Yeah, he has some excellent ideas, however, it seems that his method is so intuitive to him and his 30 years of trading it...that it is a little tough to grasp properly for others....there is a lot more that goes into it all than just the 3 lines for him...he's an awesome trader, but at the same time, proof that one still has to find their own way, even with a good method presented to them.

 

By the way, where is a good place to read up on how Linda Raschke uses the 3/10/16? Her site, or is there a better resource you know of?

[ant 10]

Reaver, the best place to learn about LBR's trade setups using the 3/10 oscillator is her website. My suggestion would be to subscribe to her "Basic Online" service for one month ($85) and make copies of her class transcripts (she encourages this). There are a lot of setups using the oscillator (i.e., Anti, First Cross, Intermediate Buy/Sell, divergences, Momentum High/Low, etc). There is a good article on momentum highs/lows using the oscillator here https://www.lbrgroup.com/index.asp?page=ArticlesFastBreak_Apr_04. Also, on her home page, take a look at the MarketVu Presentations, I believe she reviews many of her setups there. I know she also did a couple of webinars for the CBOT and the link to one of them is one her home page as well. I think she provides an excellent overview to technical analysis. I learned a lot about price action and discretionary trading from her.

 

Another good thing about her work is that she doesn't use a lot of technical indicators, she mostly uses the Keltner Channel, 3/10 Oscillator, and the ADX, and she emphasizes learning to read price action before using indicators. Once I learned her methodolgy, I actually stopped looked at other indicators. You'll be surprised how much time one can spend looking for the perfect indicator instead of learning to read the market. Even though I don't trade her setups anymore, I still use the principles that she teaches in my trading.

[Reaver 10]

Good to go, thanks for the info Ant.

[BlowFish 10]

When is a discretionary trader simply a 'system' trader that overrides there signals? For example I think that the LBR method and the Goslin method could be 'systematised' or put another way programmed to spit out signals. One could then choose whether to take them or not (hence exercising discretion).

 

Of course you could say I am only going to take a trade when the 3 crosses the 10 "by a good amount" and the volume is "high". Is it valid for a discretionary trader to leave these terms 'fuzzy'? If not these variables can be systematised. Incidentally computers can do a reasonable job at 'fuzzy' stuff.

 

The reason I raise this is because as a discretionary trader I am constantly asking myself :- What should be included in my trading plan, and what can be safely left out? And, how rigorously should these parameters be defined. (high,good,wide,long) Honestly I don't know the answer to this. Do you define stuff rigorously then only take the ones that 'feel right'? Is one of the failings of less successful discretionary traders the fact they don't define there setups rigorously enough?

 

Cheers.

 

Edit: oops gone of at a bit of a tangent.

[ant 10]

For me, discretionary trading is more about adjusting trade strategy to market condition and market behavior, not necessarily "overriding" trade signals that can be programmed and automated. I believe that one can program many, if not all, of LBR's trade setups if taken in isolation, but that won't lead to profitable trading - she admits that. Her trade setups basically identify market tendencies that can provide an edge under the right market conditions. So what are the "right" market conditions? That's one area where I prefer to use discretion. Sure, I can use stuff like indicators to describe patterns and market conditions to a computer so that it can determine what type of trades to take, but that description is usually too rigid, IMO. Our brain processes so much information and goes through so many steps to accomplish simple things that we usually take it for granted until we have to teach someone something or describe it to a computer in the form of an algorithm. Our right-brain abilities, such as pattern recognition and synthesizing information, is very awkward for a computer to accomplish accurately and efficiently, yet we can often perform those tasks quite proficiently if we know what we are looking for. I believe that pattern recognition is a key skill that expert traders possess. So generally speaking, that leads me to believe that discretionary trading is the "better" path to achieve expert trader status, if one is to get there (just my opinion). I also believe that it would be impossible right now to get computers to "think" the way human beings think and draw conclusions. Although I believe in keeping it simple, I do acknowledge that the market is a complex entity that cannot be mastered without market understanding or by getting "green light/red light trade signals" from a computer. As Einstein said, "Make everything as simple as possible, but not simpler." I think that many trade strategies being used are "too simple" for a changing, fluid market. Wow, a lot of opinions, views and ramblings here, but I've written this much so I think I'll continue.

 

Understanding price action and market behavior - how auction markets work - through Market Profile is one component of my trading methodology. This is the component that makes my trading discretionary. In short, my trading has been heavily influenced primarily by LBR, Wyckoff, and the books Mind over Markets and Markets in Profile. Below are some examples of factors that I consider during my routine nightly preparation and during the trading day. For me, these factors lead to market understanding (which is whatever I can glean from the markets given my limited trading experience) which helps me determine trade strategy, trade location, risk, stops, targets, etc. It also helps me determine how aggressive I should be in the markets. There is a lot of subjective stuff here, but I think I structure it in a systematic fashion. Anyway, here are examples of stuff I look at for my trading.

 

• context, such as what is currently driving the market and what are the long-term, intermediate-term and short-term market conditions
  
• long-term, intermediate-term and short-term support/resistance levels
  
• was a market rally driven by short covering or long liquidation and is new buying/selling coming into the market
  
• bracket and balance area extremes
  
• areas where price is rejected and accepted
  
• where do traders have resting stop orders
  
• how are traders feeling about their open positions
  
• where are traders' setups likely to trigger
  
• market correlation (especially between the ES and YM)
  
• pattern recognition in price action and Market Profile shape
  
• market volatility
  
• volume analysis
  
• market internals
  

By trading using a discretionary style, I hope I can pick up on market nuances that will provide an edge in my trading. I believe that learning to pick up on these nuances, which comes through extensive experience, will lead to becoming an expert trader, which is my aspiration.

 

Folks, I know many of you will disagree with my views, but please note that no offense was intended nor was this post directed towards anyone. I am simply presenting my perspective as a developing trader.

 

P.S. Blowfish, and you thought you went off on a tangent.

[Soultrader 12]

Great post Ant. I would like to add my inputs here as Ant brought up some great points and steps of a mind of a discretionary trader. First, I think relatively new traders can become overwhelmed with processing a ton of info and market data to make a decision to enter/exit in a split second. Perhaps this is why many traders fail to become experts in discretionary trading. But all it takes is experience, pouring over charts, and thousands of hours of screen time tick by tick. In other words, it can be done.

 

Here are a few of my thoughts on what makes a good discretionary trader. I think electronic discretionary trader share similarities between floor traders. While floor traders have the advantage of reading emotions and psychology directly on the floor (also order flow), discretionary traders can also read this behavior through price action (charts). Like ant mentioned, price rejection vs price acceptance, understanding where stops are, spotting short covering vs long liquidation, order flow through tape, etc... Luckily for electronic traders, we can draw lines, fibs, etc.... all these handy tools available directly on our charting packages. What Im trying to say here is that once electronic traders understand the behavior of the markets (whether it be through market profile or pattern recognition) our edge is no different from the edge of floor traders. (only commission costs)

 

Listed below is a few things that I apply in discretionary trading. Speed of execution is important and it all boils down to making a buy/sell decision by processing all these information in a matter of milliseconds to seconds. (may duplicate Ant's list)

 

1. Understanding the type of market. Are we seeing a balanced market? Is there only short term market participants trading? Are we seeing short covering at the opening due to the fact that the past few trading sessions were all decline? Is today long liquidation? If so, why would you support and look for a long setup when you know a few thousand contracts may still be on the sell side? etc...

 

In quiet morning sessions, short term traders may be trading against each other only. However, any range extension in the afternoon with price acceptance will indicate longer term market participants became convinced and stepped in to buy or sell. Doesnt this indicate traders trying to hold overnight positions?

 

2. Once identifying the type of market, how will you play this market? If its balanced, you may consider fading the previous day high/lows. Or if the previous day range was wide, you might look for single run trades instead of homeruns. If the markets broke out of the previous day range, you may look for pullback strategies. Did the markets rally in the morning with internals bullish? Perhaps you might want to capture a retracement after profit taking clears. Discretionary trading is all about strategy, strategy, strategy. And thinking of a new strategy 3 steps ahead of your opponent. You must have a plan on what to do before the markets react.

 

3. Pattern recognition. This does not have to be Market Profile pattern recognition. As a matter of fact, I do not even use a real-time MP chart. Instead I can simply visualize a mp chart of candlestick charts. Howevever pattern recognition in terms of candlesticks is important as well. Not 3 bar reversal patterns, bullish/bearish elgufing, etc.. but a group of bars in general. For example, if price is testing the high of day but I am not seeing that many sellers and candles are sort of clustered up at the top of the range... this pattern indicates strength. I may buy before a breakout and sell to breakout momentum traders. Recognizing candle formations in clusters is what I am referring here.

 

4. Trading psychology. We are not trading the markets. Day trading futures is about trading other traders. Whoever outhinks their opponent is going to win. Therefore it is important to understand the psychology behind price action. Now some traders may do this through candles which is good. Others might spot higher lows/lower highs and determine whos winning, bull/bear confidence, etc... But traders need a way to understand the confidence, pain, euphoria, of traders who are behind each price move.

 

5. Think alone and not with the herd. If stop placements are at the same locations with the herd, if entry levels and exit levels are the same with the herd, the professionals are going to eat your money. I dont recommend anyone to try to catch a falling knife (though I tend to find catching bottoms easier than tops) but you need to be a few steps ahead of the herd.

 

6. RULES! Yes, I think discretionary traders need to develop strict rules. NOT on trading setups entirely but on risk and money management. New traders who go down the path of discretionary trader without proper money management are going to fail. Lets say you use 2pt stop on the S&P and get stopped out 3 times in a row? You are down 6 S&P pts all of a sudden. What are you going to do next? New traders are most likely going to continue to trader throughout the entire day to make up that loss and likely resulting in a combined loss of over 12 S&P pts in one day. Now that is financial suicide.

 

So money mangement is important. You should understand your discretionary trading to a point that if you experience 3 losing trades in a row.... you are probably not in sync with the markets today and best to reassess your strategies and maybe come back in the afternoon to approach trading. In other words, discretionay traders with proper money management should become more defensive if you are experiencing a string of losses. You may decide to trade more conservatively for the rest of the day and look for that 1-2 setups that you know are good instead of trading aggressively. Discretionary traders must realize the days when things seem off from days when things are hot. Sort of like Michael Jordan where he would go on scoring on hot days but on cold days will look to assist other players more. You can still make money on cold trading days!

 

7. And finally VOLUME. If you have no idea how to read volume, I personally think you need to find another job. lol Ever watch bloomberg and see the market analyst pulling up a candlechart with no volume? I would fire him on the spot. Volume is as important as price. Those two should never be seperated.

 

Happy trading

[Reaver 10]

For me, discretionary trading is more about adjusting trade strategy to market condition and market behavior, not necessarily "overriding" trade signals that can be programmed and automated. I believe that one can program many, if not all, of LBR's trade setups if taken in isolation, but that won't lead to profitable trading - she admits that. Her trade setups basically identify market tendencies that can provide an edge under the right market conditions. So what are the "right" market conditions? That's one area where I prefer to use discretion. Sure, I can use stuff like indicators to describe patterns and market conditions to a computer so that it can determine what type of trades to take, but that description is usually too rigid, IMO. Our brain processes so much information and goes through so many steps to accomplish simple things that we usually take it for granted until we have to teach someone something or describe it to a computer in the form of an algorithm. Our right-brain abilities, such as pattern recognition and synthesizing information, is very awkward for a computer to accomplish accurately and efficiently, yet we can often perform those tasks quite proficiently if we know what we are looking for. I believe that pattern recognition is a key skill that expert traders possess. So generally speaking, that leads me to believe that discretionary trading is the "better" path to achieve expert trader status, if one is to get there (just my opinion). I also believe that it would be impossible right now to get computers to "think" the way human beings think and draw conclusions. Although I believe in keeping it simple, I do acknowledge that the market is a complex entity that cannot be mastered without market understanding or by getting "green light/red light trade signals" from a computer. As Einstein said, "Make everything as simple as possible, but not simpler." I think that many trade strategies being used are "too simple" for a changing, fluid market. Wow, a lot of opinions, views and ramblings here, but I've written this much so I think I'll continue.

 

Understanding price action and market behavior - how auction markets work - through Market Profile is one component of my trading methodology. This is the component that makes my trading discretionary. In short, my trading has been heavily influenced primarily by LBR, Wyckoff, and the books Mind over Markets and Markets in Profile. Below are some examples of factors that I consider during my routine nightly preparation and during the trading day. For me, these factors lead to market understanding (which is whatever I can glean from the markets given my limited trading experience) which helps me determine trade strategy, trade location, risk, stops, targets, etc. It also helps me determine how aggressive I should be in the markets. There is a lot of subjective stuff here, but I think I structure it in a systematic fashion. Anyway, here are examples of stuff I look at for my trading.

 

• context, such as what is currently driving the market and what are the long-term, intermediate-term and short-term market conditions
  
• long-term, intermediate-term and short-term support/resistance levels
  
• was a market rally driven by short covering or long liquidation and is new buying/selling coming into the market
  
• bracket and balance area extremes
  
• areas where price is rejected and accepted
  
• where do traders have resting stop orders
  
• how are traders feeling about their open positions
  
• where are traders' setups likely to trigger
  
• market correlation (especially between the ES and YM)
  
• pattern recognition in price action and Market Profile shape
  
• market volatility
  
• volume analysis
  
• market internals
  

By trading using a discretionary style, I hope I can pick up on market nuances that will provide an edge in my trading. I believe that learning to pick up on these nuances, which comes through extensive experience, will lead to becoming an expert trader, which is my aspiration.

 

Folks, I know many of you will disagree with my views, but please note that no offense was intended nor was this post directed towards anyone. I am simply presenting my perspective as a developing trader.

 

P.S. Blowfish, and you thought you went off on a tangent.

 

 

Hey Ant, I definitely do not disagree with you. I think you hit the nail on the head! I think that is the epitome of a discretionary trader. Study a range of factors and decide what they are telling you.

 

Reminds me of what William Gallacher said, in that as great as computers are, you cannot teach it to do things that humans can do intuitively...

 

For instance, when you look at someone's face, how do you recognize it? Yes, you can say there are certain characteristics about them that stick out, but that is not really how you recognize THEM. It merely narrows down your possibilities of who it is. You cannot really program that sort of thing into a computer. There are many many many factors that your brain pulls together for you that would be impossible to explain or program into a computer.

 

Yes, purely systematic trading relies on probabilities and statistics as well....but without a human brain to interpret the data, this could lead to doing some pretty stupid things.

 

Just because you know that most speed limits on highways are 55 mph, doesn't mean that if it is snowing and sleeting that you should still drive 55 mph...or if the air in your tires is low or if you have worn brake pads, etc.....

 

You can do some amazing things with computers, and obviously, as demonstrated by some of the most famous traders out there, you can make money trading using programmed systems, etc.....

 

But then again, you could in theory go play out in the street every day your whole life and not get run over by a car either...but I wouldn't recommend trying it.

[ant 10]

James, a lot of great information. If one were to research the ideas in your post, one can create a robust trading plan, IMO.

 

7. And finally VOLUME. If you have no idea how to read volume, I personally think you need to find another job. lol Ever watch bloomberg and see the market analyst pulling up a candlechart with no volume? I would fire him on the spot. Volume is as important as price. Those two should never be seperated.

 

Volume is one of the few pieces of market-generated information available. It provides important clues regarding the conviction of traders/investors. In my opinion, learning to interpret Volume is what will make a trader a viable opponent in the markets. There is no doubt in my mind that most professionals use Volume in their trading.

 

Reaver, well said! You made the point better than me regarding the human brain vs computers. And yes, I agree that traders can be successful with mechnical systems; however, it is becoming increasingly difficult. Those traders who take time to develop market understanding will most likely be successful with any trading approach, discretionary or rule-based. The problem I see is with traders who don't take the time to learn to read price action and turn to indicators and mechanical systems because they want to start trading right away. They are looking for shortcuts in a business where there are no shortcuts. Unless of course we get lucky like with the internet bubble of the late 90s.

[ppperkins 10]

I am new to trading, but I was a geek among computer geeks back in the day. Here is a summary of a few conversations I've had with a few hedge fund developers that I know.

 

1. You have to take the good with the bad when dealing with automated software. Programs make constantly make bad trades that a good discretionary trader would not make. They overcome this with sophisticated money management tools. A bad trade by a computer is the same as a bad trade by a person, it puts money on the table for someone else.

 

2. An automated system may backtest really well, but can do terribly when actually implemented. New software is often retired because a new player such as a hedge fund can throw off the dynamics that make the strategy successful and a system doesn't automatically adapt. As the market becomes "more chaotic", as some have argued in earlier posts, automated systems will become harder to implement successfully. Over time, I believe that this will become very expensive to support unless significant sums are involved. I don't know if there is enough evidence to say that cost/benefit of using an automated system will always win out.

 

3. As has historically been the case, larger sums of money continue to be pushed ino large institutions. If a fund is trying to liquate a $200M position, they have to expect a certain amount of inefficiency in the transaction. That leaves a lot of opportunity for crumbs that the quick and nimble can eat up.

 

4. OTC products are REALLY, REALLY hard to automate.

[WHY? 16]

dog is right, being nimble has its advantages. I remember when I would visit mutual fund co's that were trying to get us to sell their funds and one of the biggest (American Funds) and one of the best would tell us that it takes MONTHS to build and MONTHS to unload a position. When you get so big, you have to enter positions in such a way as to not raise any flags which is easier said than done.

 

There's something to be said to be able to flip on a dime, but that also implies you are trading very little in the grand scheme of things. I'd like to think of myself as a nimble, bigger little guy.

This would go along with George Douglas Taylors beliefs...Tom Williams...and many others. The months and months to unload means they have to manipulate the markets to do this. They have to set themselves up to accumulate and distribute and all this takes time.

 

My thoughts on the discretionary traders place in the future: There will always be a place for him. Adaptation will be required but his place is secure. Think of all the automated processes NASA has in place for the space shuttle. Yet every flight must have, and needs human decision making and input. Will we ever fight our wars with robots? Perhaps, to some degree but never completely. Our ego would not allow that. Neither will it for trading. As long as there are markets there will be humans involved in making trades directly. My .02 worth! We will figure out how to beat the machines!:boxing:

[Reaver 10]

Good points WHY....I like the NASA analogy.