On Discretionary Trading (Part 1)

I suspect these are not going to be new thoughts on discretionary trading but they are the first I’ve had in a while.

I feel my approach is more unique than my trading strategies. The former is based on system development whereas the latter can be found in trading books anywhere.

Despite going through the 15-year database twice, I am not done with naked puts. I have a large sample of trades and historical context for expected returns in good times and in bad. Much data analysis remains to determine whether any hidden edges exist but I’m happy with the conceptual framework developed thus far.

We had a good trading group meeting the other night where two new strategy variants were discussed. When it comes to discussing a trade or strategy, my mind immediately goes to system development. Is it something that can be operationally defined? If not then where are the holes? How much of a pipe dream are we actually considering?

After naked puts, a butterfly trade is the next place I would like to channel my efforts. I’ve given this some thought and had trouble defining the strategy in simple and limited steps. I generally find too many degrees of freedom for a systematic approach. Perhaps this is more suited as a discretionary trade with loose, general guidelines.

The problem is that I remain very skeptical about discretionary trading. Some of my old ideas may be read here, here, and here. In the next post I will start to describe my current philosophy.