Mechanical Trading, Discretionary, or Both?

01/28/2016 9:15 am EST

Focus: STRATEGIES

John Forman

Senior Forex Analyst, Thomson Reuters IFR Markets

Rereading an article on the subject of hybrid trading has led John Forman of The Essentials of Trading to analyze the advantages of mechanical trading versus having a more discretionary approach and whether or not he feels a combined effort is feasible.

Philosophical question: If you trade partly in a mechanical fashion and partly in a discretionary fashion, are you really trading mechanically at all and not just discretionary?

I ask that question after rereading an old article on the subject of hybrid trading, which is described as combining mechanical and discretionary approaches. The piece takes the view that mixing the two approaches can serve to counter the issues which each of them have individually.

In terms of the mechanical approach, the advantage is suggested to be that such systems provide very clear signals and thereby reduce the opportunity for psychological issues cropping up to derail our performance. On the negative side, however, sometimes mechanical signals can completely conflict with the market view we’ve developed. Whether that’s a bad thing is open to interpretation, though.

The reported advantage of discretionary trading is that it allows us to trade in a way which may better account for current market situations. The short-coming, though, is that such an approach can be subject to psychological problems, as well as a simple lack of market understanding.

The article goes on to basically describe hybrid trading as being an approach in which the trader decides which signals provided by a mechanical system they will take and which they will ignore. Doesn’t this basically sound like a bad implementation of a mechanical system?

Personally, to my mind if there is any kind of discretionary element to the trading process, particularly with respect to entry and exit, then I consider it a discretionary approach overall. To read the entire article click here…

By John Forman, Author, The Essentials of Trading

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