In this episode of Truth About FX, Walter talks about probably one of the most commonly misunderstood traders: what are discretionary traders? And what draws the line between discretionary trading and algorithmic trading? According to Walter, every trader has rules and there are traders who uses their gut. But, not every rule should be translated into codes.
Download (Duration: 06:22/ 7.29 MB)
In This Episode:
00:33 – struck a nerve
02:24 – a code
03:18 – bad name
04:56 – over optimizing
Announcer: Sometimes, forex trading is a wild and wooly place to be. That’s why Hugh is here, to post your questions to Walter, the naked forex guy. Hugh’s got questions and Walter’s got the answers. Here at the Truth About FX Podcast.
Hugh: Hi, Walter. What does it really mean to be a discretionary trader? Does this mean that I trade more on feel or do I actually use a system?
Walter: Okay. This person, this listener, struck a nerve with me because this is something that comes up a lot. People will say like, “You’re a discretionary trader because you don’t have rules” or, “If you can’t automate it then you’re a discretionary trader”.
I understand why they are saying that and usually the hard core algo guys, the EA guys, are the ones that are saying this stuff and I get it. I get what they’re saying. If you can’t code it up then you’re not trading a system or they’ll say something like that.
You can’t code it up, if you can’t get your system down and code it up and turn it into EA, then you’re not trading your trading system. You’re doing something different, you’re trading on your gut.
That kind of gets me because what I will say and what I’ve noticed about these EA guys and these algo guys is that typically, they’ll see something in the charts and then they’ll code it up and they’ll go, “What? It doesn’t work. Why hasn’t it work?”
The reason why it doesn’t work is because they’re seeing something else in the charts in the way that they would trade it or in the way that they see the charts and they’re not putting into their code.
They’re actually missing something that you can use and you can leverage off of if you’re a discretionary trader but you can if you’re an EA trader, if that makes any sense. So, basically, what I’m saying here is that a discretionary trader can take their system and turn it into rules.
You can list all those rules. However, you may lose something if you take those rules and you turn it into a code. That is something that I would say here is that every discretionary trader should be able to sit down and go “This is my trading system” and they can write a bunch of rules but turning that into a code is something else and you may lose out on somethings when you turn it into a code.
I don’t think that necessarily every discretionary trader who trades systematically and has trading rules should be able to turn it into a code. Now, algorithm traders may disagree with that which is fine.
The other part of this is that there are those traders who just trade on their gut. Whereas, most discretionary traders actually have a trading system and they have rules they abide by.
There are some traders that just go, “Well — like a man I’ve met in London — I just trade the scalping system when I trade.” I said “Really?” He goes, “Yeah, I trade it during the Asian Session.” “But that’s late at night in London?” He go, “Yeah”. “What do you do?” He goes, “Well, I just wait till I think it goes too far and then I trade it back.” It’s like a reversion to the mean but he doesn’t, really. I think he’ll just goes too far and then traded it back.
So, that’s like trading by the guts sort of thing. That is something maybe not most discretionary traders do because they actually have, most of them have, rules. I don’t think calling someone a discretionary trader like calling them a bad name.
Some algorithmic traders, they think that. That is the way they think. “Oh! You’re just a discretionary trader. You don’t have any rules” No, no. I think that most discretionary traders should and do have rules but they’re not trading by the seed in their pants. Sort of trade with your gut sort of a trader and that when you try and turn these systems into algos and EA’s, there’s usually something lost there.
It’s hard to put in words for the trader, what is missing, but that is often what happens. So, I would just keep that in mind too guys when you’re doing this that you are sometimes doing a little bit more than you realize.
For example, maybe it’s that thing where you’re only trading low volatility markets and you don’t really realize that there’s certain charts that you like and certain charts that you don’t like and both of the charts actually have a signal but you only take the one or the other one.
That maybe because low volatility is part of what you’re looking at but it’s not something that you’re conscious of. That’s what I say about discretionary trading. I know people give it a bad name and saying you should be able to turn it into a computer program. I don’t agree. So, there you go, for what it’s worth. Yeah.
Hugh: I went to my robot phase back in the day and the thing that was funny about that was that in the website, they’ll always say “Oh, yeah! We backtest it over this amount of time. Here’s the amazing result.” Then, you buy the robot, you put it in and then the next month, they’ll send you a code update and tell you, “This is the new settings that you should be using.” So, I was like almost discretionary, anyway. It cranked me up.
Walter: They are over optimizing. What they are doing is they’re setting it to what have done well recently. So, they’ll give you the new settings. That would’ve done well the last three months or whatever. It was but there’s no guarantee that it’s going to work in the next three months going forward.
There’s a lot of pitfalls with that stuff and if you’re not really careful, you can over optimize. Obviously, forex has a dirty name because of these over optimized, published results that they have when they are trying to sell you an EA. That’s basically what’s it.
They’ll over optimize it. They’ll look like something brilliant, it’s not going to work at all in the future but, wow! That worked well the last three years so that’s how they’d get you to buy it.
Mostly traders in forex, they are allured to that. They understand that that’s what is going on now. It’s not what it appears to be but just because someone is calling you a discretionary trader. I wouldn’t take offense to that.
Sometimes, they’ll call you that. It’s like they’re calling you dirty names but it’s not. You still have rules, don’t listen to them. Don’t let them bring you down.
Hugh: That’s a good advice. Thanks, Walter.
Walter: Okay, thanks. Bye.