Traders, Plans, and Systems

Regardless of time frame, anyone expecting investing or trading success needs a plan.  Two of our favorite and featured sources — Dr. Brett Steenbarger and Bill Rempel — take apparently different viewpoints in a discussion about discretionary trading versus system trading.

It is a constructive discussion.  Somewhat to our amazement, we found ourselves agreeing with nearly all of the twenty-two bullet points in both lists.

There is plenty of good advice, so we encourage readers to check out Dr. Brett’s A Few Trading Psychology Observations.  He mentions some lessons from his most recent book which we reviewed a while back.  We have recommended the book to those engaged in various performance activities, not just trading.  (Now if I can only get my autographed copy back from that bridge expert in Wisconsin who walked off with it!)

Bill Rempel is actually much closer to what we do.  His observations characterize the approach of the careful and disciplined system trader.

It is a delight to read these articles back-to-back and we encourage you to do so.

The Trader

Here is a crucial point from Dr. Brett’s list:

A sizable proportion of traders who have been having problems are
trading methods and patterns that used to work, but are no longer
operative. The inability to change with changing markets affects
traders intraday (when volume/volatility/trend patterns shift) and over
longer time frames (when intermarket patterns shift).

And following this up, he notes:

Traders develop plans and trade patterns that simply don’t work;
they’re based on randomness. When the patterns don’t work, traders
become frustrated and abandon their plans. So it looks like lack of
discipline causes trading failure. But planning doesn’t create success;
sound planning does. Sticking to plans based on randomness is no virtue.

The System Guru

Bill Rempel does a fine job of describing the approach of the system developer.  It is almost like listening to our own Vince Castelli.  Bill writes:

Systems can be optimized to work in one market regime, with a signal or
overlay allowing the system to switch when regimes change, or the
systems can be optimized to work “overall” regardless of the particular
regime in place at the moment. The significant downtime that systems
traders have (since they’re not watching the market every minute)
allows them to step back and take a look at longer-term market patterns.

Bill has confidence in his plans because they are tested and proven:

Sound planning, i.e., BACKTESTING, is the basis on which the systems
trader approaches the market. Not only are the plans based on sound
market analysis, the plans are EASY TO STICK TO, because the system
trader has REASONED CONFIDENCE in its backtesting.

Our Take

We have only provided a sample of the observations.  We strongly recommend that anyone who develops models or engages in discretionary trading should read both articles several times. 

Unfortunately, most people who should be reading this exchange will not.  This includes the audience that we think about the most these days, all of the people who have been convinced by television commercials that they can be great traders.

Meanwhile, our own conclusion is that there is less difference between the two approaches than one might think at first.

The trader needs to have a real plan — one that has been tested and proven.  Then he must stick to it.

The system trader may not view the system signals as mere suggestions.

At the risk of oversimplifying this discussion, we sense that both viewpoints lead to a similar place.