Under this “dramatic headline” is a pledge to cut down discretionary trading and focus on systematic automated trading.
I think many traders (and I include myself) suffer from “bad” discretionary trading: entering a trade without a proper trading plan or system, only based on “gut feelings”.
I am no exception and have recently experienced being in trades that do not turn out as expected. I personally feel a bit lost in these situations and wish I had a better plan…
Without a proper plan, the management of the open trade is subject to all sorts of emotional influences, mostly greed and fear…
I recently went to a motorbike track riding school. The instructor was demonstrating that all our instinctive “survival” behaviours when faced with a “situation” almost always make things worse. I believe the same equally applies to managing an open trade: without discipline and a plan, you are most likely to take all the wrong decisions.
And despite reading about how a trade plan is important, how cutting your losses short and letting your winners run is the way to trade, you still make these same mistakes, knowing full well that you are making them but still thinking that “it might work” (doubling down, letting losers run, etc.
And as John Mayard Keynes said:
The market can stay irrational longer than you can stay solvent
Discretionary trading is an intuitive approach with no reference to the past (as opposed to a back-test that provides you with a frame of reference). Your decisions are based on interpretation of events – which is mostly subjective and dependent on your emotional state (i.e. most likely affected by your current loss or gain). Unless you are Paul Tudor Jones and able to decipher the markets and make the right calls, discretionary trading is a very hard art to master.
Now, this is not saying that automated trading does not offer its own psychological pitfalls including:
- skipping trades/overriding signals
- not being able to live through large drawdowns and stopping trading the system
- search for “holy grail” and curve-fitting in back-test
This is not saying that great discretionary traders do not exist either; but having a tried and tested system that you trust will give you the comfort of a reference, which should in turn give you an incentive to stay displined and follow it.
Now, finding a good system to trade is not easy so let’s get to work! ;-)