👩🏫️ Discretion in Mechanical Trading
Discretion in a mechanical trading system is a controversial topic. A mechanical system works on fixed rules. If a trader starts ignoring those rules based on personal judgment, discipline and consistency can quickly disappear. That is why the system should normally be followed as designed.
However, markets can sometimes change in ways that the system was not built for. A major change in market behavior or a sudden price shock can make blindly following every signal risky.
🟩️ When the Market Stops Behaving Normally
A paradigm shift means a long-term change in market behavior that makes a previously successful trading system much less effective. There is no perfect way to identify such a change, but the system's own history can give us some warning signs.
For example:
In such cases, it may make sense to:
The idea is not to abandon the system. It is to reduce risk until the market starts behaving normally again.
🟩️ When Volatility Jumps
A similar problem can occur when volatility suddenly increases. A trader could use something like a 50% increase in one-year historical volatility as a warning level. But a fixed number is not always enough.
For example:
So, sometimes the trader needs to look at why volatility has increased, not just how much it has increased.
The important thing is that discretion should mainly help in reducing exposure, rather than deciding which signals to take based on feelings.
🟩️ Make Discretion Rule-Based
One solution is to create rules that tell us when discretion is allowed. Possible triggers could be:
This is better than simply saying, "I don't like this trade."
The trader already knows what action to take when a specific condition occurs.
🟩️ The Problem With Personal Judgment
Things become more difficult when we start using less objective information, such as: News, , Market sentiment, Interest rates, Fundamental changes, and Other personal interpretations of the market
These things may sometimes be useful, but they can also make the original backtest less meaningful. If the trader starts skipping trades because of personal judgment, the system being traded is no longer exactly the same system that was tested.
More importantly, it can create a bad habit.
Today you skip one trade because it "doesn't look right." Tomorrow you skip another. Slowly, the mechanical system can turn into a discretionary system.
🟩️ The Main Point
Discretion can have a place in mechanical trading, especially during unusual market conditions. But it should be limited and preferably based on predefined, measurable conditions. The goal is not to predict every market change. The goal is to:
Protect capital → Reduce risk when necessary → Maintain discipline.
Until a trader has proved that they can follow a mechanical system consistently, simple rules are usually better than personal judgment.
💬️ Would you follow your system when everything starts going against you?
Discretion in a mechanical trading system is a controversial topic. A mechanical system works on fixed rules. If a trader starts ignoring those rules based on personal judgment, discipline and consistency can quickly disappear. That is why the system should normally be followed as designed.
However, markets can sometimes change in ways that the system was not built for. A major change in market behavior or a sudden price shock can make blindly following every signal risky.
“Almost anybody can make up a list of rules that are 80% as good as what we taught people. What they couldn’t do is give them the confidence to stick to those rules even when things are going bad.”
— Richard Dennis
🟩️ When the Market Stops Behaving Normally
A paradigm shift means a long-term change in market behavior that makes a previously successful trading system much less effective. There is no perfect way to identify such a change, but the system's own history can give us some warning signs.
For example:
- More consecutive losses than ever seen in backtesting.
- Drawdown becomes larger than the previous maximum.
- Stop-losses are being hit much more often than normal.
- The system's performance becomes very different from its historical behavior.
In such cases, it may make sense to:
- reduce the position size, or
- temporarily stop taking new signals.
The idea is not to abandon the system. It is to reduce risk until the market starts behaving normally again.
🟩️ When Volatility Jumps
A similar problem can occur when volatility suddenly increases. A trader could use something like a 50% increase in one-year historical volatility as a warning level. But a fixed number is not always enough.
For example:
- A 45% increase caused by a short-lived news event may not be very important.
- A 20% increase caused by a major change in supply and demand could be much more important.
So, sometimes the trader needs to look at why volatility has increased, not just how much it has increased.
The important thing is that discretion should mainly help in reducing exposure, rather than deciding which signals to take based on feelings.
🟩️ Make Discretion Rule-Based
One solution is to create rules that tell us when discretion is allowed. Possible triggers could be:
- Volatility exceeds a predefined level.
- Consecutive losses exceed the system's historical maximum.
- Drawdown exceeds the historical maximum.
- A trade produces an unusually large profit.
- Important market correlations suddenly break down.
This is better than simply saying, "I don't like this trade."
The trader already knows what action to take when a specific condition occurs.
🟩️ The Problem With Personal Judgment
Things become more difficult when we start using less objective information, such as: News, , Market sentiment, Interest rates, Fundamental changes, and Other personal interpretations of the market
These things may sometimes be useful, but they can also make the original backtest less meaningful. If the trader starts skipping trades because of personal judgment, the system being traded is no longer exactly the same system that was tested.
More importantly, it can create a bad habit.
Today you skip one trade because it "doesn't look right." Tomorrow you skip another. Slowly, the mechanical system can turn into a discretionary system.
🟩️ The Main Point
Discretion can have a place in mechanical trading, especially during unusual market conditions. But it should be limited and preferably based on predefined, measurable conditions. The goal is not to predict every market change. The goal is to:
Protect capital → Reduce risk when necessary → Maintain discipline.
Until a trader has proved that they can follow a mechanical system consistently, simple rules are usually better than personal judgment.
“Markets are never wrong — opinions often are.”
— Jesse Livermore
💬️ Would you follow your system when everything starts going against you?
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関連の投稿
免責事項
これらの情報および投稿は、TradingViewが提供または承認する金融、投資、取引、またはその他の種類の助言もしくは推奨であることを意図したものではなく、またこれらに該当するものでもありません。詳細は利用規約をご覧ください。