Rules vs. Discretion

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“You are not supposed to think when you trade.
You are supposed to collect the prize for your past thinking.” JC

 Random thoughts on non-random facts and truths

  • Human frailness makes it very difficult for newcomers to the cyber-trading world to score big and often by trading discretionarily.
    Shooting from the hip may have worked in the Wild West or may work now in other professions but never in cyber-trading.
  • The only way for beginners to stop walking on Failure Road is for them to learn to trade by rules they can absorb easily.
  • Brain hardwiring makes it difficult for traders to exclusively trade discretionarily for a long time and to fatten their wallet in the process.  The proverbial exception confirms this truth: maybe our brain is hardwired to forget and forgive more than stay focused once something brilliant has been discovered and put into practice.
  • Is there anything better than trading strictly system rules?
    No, there isn’t.  Why should it be?
  • Rules based trading has always been the goal of every investor and money manager with one purpose in mind: success.  The problem always is to find rules which work better than other sets of rules.
  • The irony is that the 300-year history of securities trading proved that wave after wave of discretionary traders washed out of the markets faster than system traders and, even more ironically, that not all the system traders who had observed rules religiously grew rich becoming accomplished professionals.
    There are several reasons for this not discussed here.  Only few system traders got rich and stayed in business while most system traders have ended up beating around the bush forced to quit the securities arena with the tail down worse than they started.
  • There are a few thousands of mechanical trading systems (MTS’s) today in 2014, some more popular than others, with more systems being developed and tested every day.
    Research departments at institutional trading firms spend considerable money and resources every year to study market behavior which they suspect of subtle changes.  New MTS’s are put to work every week.
    Chief programmers take home salaries in excess of US$500,000/year chasing subtleties which forever elude them simply because there isn’t any.
  • However, no matter how complex or effective the MTS, human weakness devalues it more than it enables the trader to make the best of it: the most extraordinary MTS produces mediocre results in the hands of someone who is undisciplined by nature while a simple, well-known MTS in the hands of a disciplined trader produces amazing results.
  • Sometimes looking for new trading concepts saves the day, sometimes using popular systems saves it.
  • The goal is to strike the balance between searching for that which identifies you and using readily available knowledge.
  • Because of computing power, our machines allow us to automate the entire trading process fulfilling an old dream of stress-free profits.
    However, fulfilled dreams come with a problem: they make room for a psychological vacuum until a new dream is found.
  • It is much easier and profitable to fight the dangers of rules, automation and successful routines than to fight the inner destructive habits and the crushing passage of time which removes the many losers out of the arena just to reveal the only winner.
  • The trip, rest or going back do not work by themselves, only combined do the three of them do the trick.
  • Time has proven that - regardless of high research costs - no great MTS has ever been invented by staff at investment banks: there is no such system as JP Morgan Bank Special Moving Average, Citibank Recalibrated RSI or Bank of America Mortgage-backed Securities Winning Bearish Tool Kit.
  • And one more thing: history has never been written by teams of untalented men hypnotized by top salaried jobs from nullities hypnotized by profits but only and only by few individuals who found peace working in isolation and loneliness for long periods of time.
    They are the ones whom the Destiny chose to win big and their fate was from the beginning to attract the ecstatic crowds one day.
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