Strategies vs. Systems (Part IV)

In my last post (http://www.optionfanatic.com/2012/05/23/strategies-vs-systems-part-iii/), I said quite a mouthful.

Let’s break it down.

“If you are a discretionary trader then you have trading strategies with guidelines… [this] relies somewhat on common sense and gut instinct.”

Discretionary traders claim to know their market through lengthy study and/or live trading experience.  They claim to have a feel for how the market moves–slow or fast, volatile or nonvolatile, cyclical ranges, etc.  They claim to have a feel for common price patterns, tendencies, and fake outs.  Based on this assumed understanding, discretionary traders develop trading strategies with guidelines.

“Common sense” includes tendencies that sound logical.  For example, it sounds logical to reduce exposure to the market ahead of big news announcements or known events when you don’t know how the market might react.  Discretionary traders often include logically sounding guidelines in their trading approach regardless of whether these boost or detract from profitability.

The unfortunate fact is that common sense trading guidelines often end up producing unprofitable trades.  This is evident in the thousands of trading systems based on common sense criteria that have generated unimpressive results.  The only way to know if inclusion of common sense guidelines is beneficial would be to define some trading rules and backtest them.  This is more work than most [discretionary traders] are willing or able to do.

In my next post, I will wax eloquent for a while about “gut instinct.”