How Mechanical Systems Can Be Useful To Discretionary Traders
Not
much to say about the market today. It appears we are in bounce
mode. Right now it’s just wait and see until the market decides to either
accelerate to the upside on volume or roll over to the downside.
Like most TradingMarkets
members, almost all of my trades are discretionary (as opposed to mechanical, or
automated). I prefer discretionary trading. I also know most TradingMarkets
members do as well. Rather than discuss why one way of trading is or isn’t
superior to the other, today I want to discuss how properly chosen mechanical
systems can be useful to discretionary traders.
One thing that is true of all
trading strategies, whether discretionary or mechanical, is that they perform
well in certain environments and not as well (or poorly) in others. This is why
most traders have a very difficult time achieving consistent returns. Your
trading strategies are in favor one day (month, year), and out the next.
While many traders are able to
recognize when their strategies are out of favor, they do not have the capacity
to switch gears and continue to profit. For instance, it is very difficult, if
not impossible to be both a trend trader and a reversal trader. As
discretionary traders, you have to pick a side. You can’t constantly flip-flop
without driving yourself bananas.
Once traders understand their
strengths and weaknesses they can look to mechanical systems to help supplement
those areas in which they consider their strategies to be weak. Money can be
made playing both pullbacks and breakouts. If you like trading pullbacks, but
have trouble with breakouts, you might consider employing a system that is
designed to profit from breakouts.Â
Intermediate-term CANSLIM
traders are sometimes prone to shakeouts during sharp market reversals. An
example of a time when many CANSLIM traders would remember a sharp pullback in
their accounts would be the end of September last year. The market and many
leading stocks sold off hard for about a week, followed by a quick recovery and
further rally. After potentially being stopped out of many positions,
CANSLIMers had to wait for further breakouts to re-allocate their capital. By
employing a system that looks to take advantage of sharp pullbacks in uptrending
markets, their accounts may have faired better. (RSI 25 Explosion system is an
example if this type of system.)
In my eyes, mechanical trading
systems can serve a part in helping discretionary traders to enhance their
overall returns. Assuming you are a discretionary trader because you believe
over the long haul you can outperform mechanical systems, you should not use
systems that trade similar to you. You could be running the risk of
overexposure to the market. In my eyes the best uses for mechanical systems are
1) As a hedge against your own trading (ie. reversal system vs. trend trader),
2)a supplement to your weaknesses, (breakout vs. pullbacks) or 3) as an
uncorrelated strategy (ie.commodities system vs. stock trader).
Best of luck with your trading,
Rob