Trade what you see, not what you think....

I came across this post which is an excellent response to a great post from Shakone....

random12345 said:

Can I be even more simplistic and just say that humans also struggle to understand, visually, basic geometry. I'm yet to show anyone an example of a smooth MA crossover who, looking at the trades taken, think it isn't overall profitable and are always surprised to find that the ranging periods are actually often more harmful than the trending periods are profitable. The same logic applies to visual confirmation of breakouts, support and resistance, key areas etc. The brain somehow blots out what they don't want to see. Institutions don't trade anything they can't test empirically (any instrument that has been around for years anyway - ignore certain ETFs and exotic indices traded by a certain Whale for this example). Yet retail traders do on the basis that it 'looks right' and all they need to do is sort out their psychology. This, for me, is the most startling difference and a tragic mistake. Method trumps psychology every time. Laziness and ignorance of technology can barely be tolerated in this industry these days - you must be able to thoroughly test your ideas. Go to almost any IB's careers page and see if they are looking for entry level traders. No, they want developer associates and the odd VP P&L controller. Nearly all senior traders will be ex Python dorks in another induction cycle and frankly they deserve it. Market forces at work....

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It got me thinking about the nature of discretionary trading and the difficulty in following the maxim, trade what you see, not what you think and how automation takes care of that non-trivial problem.

I can also see from a institutional point of view that automation is the most viable way of scaling a trading operation. The benefits are obvious.

However, after reading 'The Hour between the Dog and Wolf' which is written by a (now) neuroscientist who was a bond trader, covering the neurological and physiological mechanisms that come into play whilst trading, I cannot help but feel that humans, when at their peak, will always outperform machinery. This is largely down to the massively parallel processing capabilities of the brain which still cannot be replicated by machine.

So I believe that human based, discretionary trading will always outperform an algorithm and that system/algo based trading is useful when trying to scale an operation and in itself is a compromise between scaling and individual, human excellence.

Anyway, am curious about other's opinions on this.

Machine wins chess. Machine flies planes, drives trains. Machine executes 1000's of trades per second. Humans need to know their limitations and don't let their ego take over.

BeginnerJoe said:

Machine wins chess. Machine flies planes, drives trains. Machine executes 1000's of trades per second. Humans need to know their limitations and don't let their ego take over.

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If you have the machine that taught you grammar and literacy, I implore you to destroy it - immediately. Please.

BeginnerJoe said:

Machine wins chess. Machine flies planes, drives trains. Machine executes 1000's of trades per second. Humans need to know their limitations and don't let their ego take over.

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Yes, that's definitely an opinion Joe.

neil said:

If you have the machine that taught you grammar and literacy, I implore you to destroy it - immediately. Please.

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Joe is the 'special' kid in the T2W class Neil.

Machines will always struggle to produce anything like the returns of a good human trader, at least in our lifetime, for one simple reason - the markets are made up of humans and it's primarly human emotions that drive prices. Computers have no clue about emotions and it's impossible at present to program them because the variables are too many.

Robots looking for ticks here and there in the sub 1 second timeframe are a differnet matter of course, they outplay most humans every day of the week. However, don't think for one minute that there aren't a few excellent human traders who take on the robots and win, not many but there will be some who have worked out their weaknesses...

robster970 said:

........Anyway, am curious about other's opinions on this.........

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I would hazard that a discretionary trader who operates primarily from a "mechanical" base - ie: see this, do that - could be outperformed by automation.

However, discretionary traders who have such a good "feel" for their instrument that they operate primarily from an "instinctive" base - or the subconscious application of acquired knowledge if you like - will likely outperform automation because the reasons for the instinctive action are unlikely to be definitive.

I once had a fantastic drug catcher on the Customs bench at Manchester Airport, who had a "hit rate" miles above his peers. He couldn't say precisely why he fancied anyone, nor could we establish it when we tried having him professionally de-briefed. Couldn't have replaced him with a robot

My take is that if your edge is structural, then you may be able to best take advantage of it by automating the process. But if it's a strategic edge, chances are a human with exceptional skill will be better.

BobbyBB said:

Machines will always struggle to produce anything like the returns of a good human trader, at least in our lifetime, for one simple reason - the markets are made up of humans and it's primarly human emotions that drive prices.

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I'm not sure that is true any longer and I don't just mean HFT or algo's looking for pockets of liquidity. I get the very distinct feeling that most activity is machine driven these days. Loads of people trading 1 lots don't feature in the mechanics that move price around these days.

VielGeld said:

My take is that if your edge is structural, then you may be able to best take advantage of it by automating the process. But if it's a strategic edge, chances are a human with exceptional skill will be better.

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Agree with you, in a roundabout way.
If you are going to automate, you will fare much better by constructing it
around the limitations of automation, so those limitations don't work against you.

Thats why I personally think its not just hard (even impossible maybe),
but also a complete waste of time to even attempt to automate a discretionary edge.

robster970 said:

Joe is the 'special' kid in the T2W class Neil.

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Yeah he was years ahead of his class. they were all 6 and he was 13 :clap:

robster970 said:

I'm not sure that is true any longer and I don't just mean HFT or algo's looking for pockets of liquidity. I get the very distinct feeling that most activity is machine driven these days. Loads of people trading 1 lots don't feature in the mechanics that move price around these days.

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Absolutely agree, by way of graphic evidence, here's some research by nanex,
its an oldish post, but highlights your observation rather well:
http://www.trade2win.com/boards/ris...4-roro-new-market-paradigm-2.html#post1977540
Instantaneous switch off with ES liquidity, roughly 80% disappears in a split second.
Digital behavior...

neil said:

If you have the machine that taught you grammar and literacy, I implore you to destroy it - immediately. Please.

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You composition is somewhat weak with unnecessary sentence breakage. I suggest, more simply:

If you have the machine that taught you grammar and literacy, I implore you to destroy it, immediately, please.

BeginnerJoe said:

You composition is somewhat weak with unnecessary sentence breakage. I suggest, more simply:

If you have the machine that taught you grammar and literacy, I implore you to destroy it, immediately, please.

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Yep, much better grammar

malaguti said:

Yep, much better grammar

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A typographic omission is perfectly acceptable given its accidental nature. But extra dashes and capital letters are definite not accidental, and probably more to do with mis-education.

it is laughable that the failures are dishing out unsolicited advice pages after pages

If I were trading in the market side by side with a machine (NOT trading against it, trading the market) there’s no doubt the machine would produce greater returns than me every time. However, if I were trading against a machine it would have an advantage at first. Eventually, given enough time and trades, I could decipher what it’s doing. I could gain the upper hand because I can think, react, and adapt where the machine can’t. That’s what is meant by gaining experience.

The basis of AI is getting the machine to think and reason so humans could not gain that advantage. Maybe 100 years from now?

Peter

barjon said:

However, discretionary traders who have such a good "feel" for their instrument that they operate primarily from an "instinctive" base - or the subconscious application of acquired knowledge if you like - will likely outperform automation because the reasons for the instinctive action are unlikely to be definitive.

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I think the whole subject area depends on the level/ability of the trader. 'Feel' that has been developed by going down the correct path will be different to someone who feels trades based on no understanding. Experience will result in this ability becoming sort of sub-conscious (a bit like your drug catcher).

The subject of time also divides the ability of mechanical and discretionary, but it goes beyond this; we can all 'see' the price move, but not many can 'feel' it, let alone understand it and the consequences of what has/is happening in front of us.

So a question for people:

If you take a trade, and have a target of 30 points, and you have an educated expectation that this will take about an hour to play out, what happens if;

the price moves 22 points in your favour in the 1st 10 mins? How does this affect your trade? Do you just sit in it, waiting for 30 points? Do you even consider the effect of time in the trade? What information would you use to justify staying in the trade? Indeed, are you even asking any questions?

Lots to be learnt from this tiny 1 trade scenario, which BTW a automated/mechanical bot would have no way of understanding the consequences for the simple reason they cannot be programmed to make a outcome based on this type of cause and effect.

It also illustrates why day traders must be at the screen whilst in a trade to maximise the opportunity. It does not mean you cant take points from the trade (if you set stops and limits), it just means they wont be the optimum amount.

Many may enter a market at discretion, but once in a trade they slip back into reactive mechanical rule based mode, which as can be seen from the above example will hinder long term results.

Remember not to get too caught up on what IBs etc are doing/can do. If you understand their limitations, you will create your edge as a retail/private trader.

Of course you can forget the nuts and bolts and just rack the points up and be as happy as Larry (until the the cycle changes) then when your style works no more, you can write a book about you past success, again, just like Larry:cheesy:

wallstreetwarrior87 said:

I think the whole subject area depends on the level/ability of the trader. 'Feel' that has been developed by going down the correct path will be different to someone who feels trades based on no understanding. Experience will result in this ability becoming sort of sub-conscious (a bit like your drug catcher).

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The 'correct' path is the one that personally suits you.

wallstreetwarrior87 said:

The subject of time also divides the ability of mechanical and discretionary, but it goes beyond this; we can all 'see' the price move, but not many can 'feel' it, let alone understand it and the consequences of what has/is happening in front of us.

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The computers that drive the markets don't feel it and seem to do OK.
I'm not saying yours isn't a valid opinion, its quite likely that your 'feel' is
subconscious experience.

wallstreetwarrior87 said:

If you take a trade, and have a target of 30 points, and you have an educated expectation that this will take about an hour to play out, what happens if;

the price moves 22 points in your favour in the 1st 10 mins? How does this affect your trade? Do you just sit in it, waiting for 30 points? Do you even consider the effect of time in the trade? What information would you use to justify staying in the trade? Indeed, are you even asking any questions?

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You make the assumption that targets are essential in automated trading.
They aren't, that could qualify as a volume spike as an example.
That particular exit rule being based on max time since entry window,
qualifying volume threshold (preferably tick volume) and rate of fall in tick volume.

Even though more complexity is possible than you think,
I do agree that even with a bit of finesse and specifically targeted parameters,
its still a one size fits all rule.
It would never be right in every situation, but that applies equally to a discretionary decision.
Its also perfectly possible it wouldn't be robust enough.

wallstreetwarrior87 said:

Lots to be learnt from this tiny 1 trade scenario, which BTW a automated/mechanical bot would have no way of understanding the consequences for the simple reason they cannot be programmed to make a outcome based on this type of cause and effect.

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As explained above its perfectly possible to program something that will broadly
respond to that type of situation.
Lack of awareness does not mean impossible.
Generally though, I will agree that the higher end complex stuff is the domain
of the PhD's and server farms.

wallstreetwarrior87 said:

Remember not to get too caught up on what IBs etc are doing/can do. If you understand their limitations, you will create your edge as a retail/private trader.

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Completely agree.
I do personally think it does no harm to be aware of the behaviour of algos,
given the fact that they and their programmers drive the markets.

wallstreetwarrior87 said:

Of course you can forget the nuts and bolts and just rack the points up and be as happy as Larry (until the the cycle changes) then when your style works no more, you can write a book about you past success, again, just like Larry:cheesy:

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Mechanical can fail.
Discretionary can fail.

Plenty of traders from both camps as examples.
My style can fail, maybe tomorrow.
So can yours, how would a transaction tax affect you for instance?
Could you adapt, or would that be the failure of your edge?

Failure is a sequence of trades away for everyone,
any other way of looking at it is just an illusion.

Liquid validity said:

So can yours, how would a transaction tax affect you for instance?
Could you adapt, or would that be the failure of your edge?

Failure is a sequence of trades away for everyone,
any other way of looking at it is just an illusion.

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LV thanks for taking the time to read what was written, it is great to get feedback from someone whom shows a deep thinking about the subject.

With regards to adapting, this is a must, and shows the need for a large edge. So in terms of a transaction tax, trading larger TFs would be a must, as you still need to create value within the realms of the edge. Transaction taxes are an attempt to deter HFT, so if that is indeed the case, I will not take those trades on the exchange in question.

It is more likely that I would go to the exchange where the tax was not in place. There will always be competition for liquidity.

I will get back to some important points you make in a bit.

Thanks