Which Kind of Trading is Best:
Systematic or Discretionary?
by Andreas Diessbacher
White River Group CTA
Instead of looking forward through the windshield, would you steer your car along the highway by only looking through your rear view mirror?
Of course not. But, in my opinion, that's what you’re doing when you rely entirely on systematic trading to decide which commodity futures and options to buy, hold or sell, and when to do so.
As the saying goes, "Past performance is no guarantee of future results."
And most systematic trading programs are based on past data. They rely on computer power and programming skills to influence trading decisions. But if that were all you needed to succeed as a trader, then IBM and Microsoft would be the biggest and most successful traders in the world.
Sure, a knowledge of past trades might help you avoid historic losing positions. However, markets are evolving all the time, and every market situation is different. You can’t depend on history to predict the future, any more than you could predict that Toyota would, overnight, go from the car maker with the highest reputation for quality to the one that had to halt production and sales due to a mechanical problem.
Systematic trading has its place...if you are content to have someone else—make that something else—do your thinking for you. Then if you have massive losses, instead of massive gains, you can simply blame the computer and the computer program instead of yourself.
But the objective of trading is to make money, not excuses.
And to do that, if you’re a serious trader and not just a dabbler, discretionary trading is in my opinion better than systematic trading.
Having said that, it's obvious that I am not a big fan of back testing, hypothetical results, and all the other computerized techniques used in systematic trading and promoted by its aficionados. Please keep in mind though that either technique is subject to significant risk of losses.
You need to realize that the data and logic that goes into systematic software programs are based on correlations of past events —and those correlations may no longer hold true. In my opinion, just because, at a certain time in the past, the length of women's skirts matched the rise or fall of the market, it doesn’t mean you should be an avid reader of women's fashion magazines.
Now, I’m not saying that traders can't be successful if they rely entirely on systematic trading. Some of the most successful traders in the world are systematic traders. But so are some of the biggest losers.
It's just that there are many roads to success, and I prefer a different road as I look ahead—not just back.
So in case you're not too familiar with discretionary trading, here's what I believe you should know...
As its name implies, discretionary trading leaves it up to the trader’s discretion ("individual choice or judgment," as defined in my dictionary)—not some electronic device—to decide what to buy, what to hold, and what to sell, and when to do so.
Of course, like other traders, we constantly use state-of-the-art computers with sophisticated software. But we use them for research and to execute trades, not to make decisions for us.
I understand that trading decisions made by a computer—the systematic way—make it easier for traders because the traders do not become emotionally attached to each trade.
And if a particular trade results in a loss, the traders always have an excuse: "Well, it didn’t work out as I expected, so I will just have to improve or change my computer program, do some more testing, look for some more historic correlations, and try again. Maybe, next time, past performance will guarantee future results."
In my opinion, discretionary traders are gutsier. We do not have this excuse on hand, nor do we need it. If a trade is not successful, we have no one—or no thing—to blame but ourselves. Of course, we should still analyze what went wrong, or what didn’t work out as well as we had figured it would, and make some adjustments before the next trade. We realize that no two events are exactly the same, but many are similar, especially if they’re not too far apart in time.
Because they don’t allow their decisions to be made by a computer, discretionary traders should in my opinion experience as many different trading situations as possible, to increase their knowledge and to learn not to get emotionally attached to each trade.
I have a very simple test to determine if I like my current position in the market...or not. If I sleep well that night, I like it. And vice versa.
When I'm sometimes unsure about my trading activities, I try and get away for a short vacation and not think about trading at all. If, after a couple of days, I'm relaxed and eager to get back, I'm ready to resume trading.
If you've never tried discretionary trading, I cordially invite you to do so...with the help and advice of a pro like me. I'm the principal of White River Group, a registered CTA —Commodity Trading Advisor—which is a primarily discretionary trading company.
To find out more about discretionary trading, without obligation, feel free to contact the IASG about White River Group
Past performance is not indicative of future results.
This presentation does not constitute an offer to sell or a solicitation of an offer to buy interests in any of White River Group’s programs. Offers are made only by the appropriate Disclosure Document which should be read in its entirety. The statements in this presentation are not intended to be complete or final and are just the opinion of Andreas Diessbacher. Please also note that there is an unlimited risk associated with writing options and that trading, regardless of how the account is traded, involves significant risk of losses.