BarroMetrics Views: Discretionary and Mechanical Trading
Many years ago, Mark Douglas defined for me the three types of traders:
- The Subjective Trader: no rules, the trader trades on intuition alone. The scalper in the pit is the best example.
- The Discretionary Trader: rule based but the trader has a rule which says he can ignore his rules. This allows intuition a play a role.
- The Mechanical Trader: rules based and the trader trades only in accordance with his rules.
The type of trading that best suits us is a function of our personality: specifically the timeframe we trade and our decision-making process. Some of us are more uncomfortable with uncertainty and seek safety in the comfort of rules e.g. I believe Michael Covel would fit that mould. Others find firm rules confining in the chaotic world of trading and prefer to rely on their intuition; still others seek the comfort of rules but accept that in trading, rules will not cover its spectrum and therefore accept that intuition has a role to play.
As a discretionary trader, I find that improving my decision-making process goes a long way to improving my bottom line. Improving my decision-making process involves knowing the difference between intuition and ‘into-wishing’.
I define intuition a knowledge borne of experience - it’s knowledge that I have internalized. ‘Into-wishing’ is hoping and wanting a market will do what I desire. Intellectually the distinction is clear, in practice the two are sometimes hard to distinguish.
Preparation is an important factor for distinguishing between the two.
I find creating, visualizing, feeling certain scenarios before the market opens key to managing the fight or flight emotions. Preventing anxiety from reaching intolerable levels is important for me: once they cross a certain threshold, I find the only way to manage the adrenaline rush is to walk away from the screen.
Take Figure 1.
I have long positions that are either the ’second third’ or the ‘last third’ (See Rule of 3) - in other words I can’t lose on any of the trades.
My plan calls for the stops for the last third to be placed below the Maximum Extension 1.5439. With the market at 1.6446, that is giving back quite of bit of profit. I have to be OK with that - intellectually and emotionally.
The second third stops are below the Death Zone on the basis that if the Death Zone fails to hold, we’ll see the market reach the Primary Buy Zone at 1.5873 to 1.5706.
In my preparation, I visualize a number of possibilities:
- The market getting down to my stop levels. I prepare feeling being OK with the result.
- I also prepare what I will do should the market get down to the Primary Buy Zone and
- What I will do if there is a breakout above 1.7042 without the market getting to that zone.
Performing daily visualizations of the various scenarios is an important part of my process of accepting the loss before the loss occurs; it is also an important part of the process for taking profits, taking trades etc. The visualization allows me to execute my plan with relative ease.This preparation takes time and in the beginning I found it difficult to implement. As with most routines, the simple way is to take small baby steps to get used to doing it and then increasing the time. For example, we start with a 1-minute to 3-minute process and slowly expand the time as the process becomes a part of our waking day.
FIGURE 1
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