Sunday, October 21, 2012

Why I Think Most People (Including Myself) Fail at Discretionary Trading

If you've read through this blog, or found my history on the Internet, you'll know I'm a much better mechanical/systems trader than a discretionary one.  I suspect there are a lot of people like me (or at least people who fail at discretionary trading).

Here are the main reason why I think I have failed at discretionary trading:

No backtesting possible - makes it hard to have confidence in trading a new method

Emotions - decision making under stress is always tough

Overtrading/Revenge trading - sometimes in discretionary trading, sometimes everything looks like a signal.  Worse yet, sometimes I'd force signals to get back lost money

Too Many indicators/rules - Confusion reigns supreme, when the charts get complicated

Not Practicing Enough - Many people don't practice at all - they just start trading!

The good news for me is that I have a plan to overcome all of these issues.  I'll be presenting them in the next few blog posts.

Thinking ahead, I hope to give all readers a good process for developing and trading a discretionary trading. I may or may not reveal exact details of how I am trading (and honestly, it probably would not matter if I did), but I think knowing the steps to take will help everyone.

Next time, I'll probably talk about the first few steps.

By the way, if you are looking for a blog with lots of good info, MBA Gearhead's Blog is the place to go:   It is one one the few blogs I follow, mainly because his experience is so similar to that of most traders.


  1. No offense intended to this MBA guy, but why would you follow his blog? His performance is pretty dismal.

  2. I think the journey is the important part, and you definitely get to feel the ups and downs of trading from reading his blog.

    Too many people think you can go from reading a book, or creating a system, to immediately raking in the profits.

    So, I think people can learn more from a realistic blog like MBA's, rather than a blog of someone who supposedly wins all the time.

  3. Dismal indeed! LOL
    Thanks for the shout out Kevin!
    You and I have the same discretionary issues so I look forward to following along.

  4. Hey Kevin,

    not sure what you meant by "No backtesting possible". A method that is back tested should be the same method traded on a consistent basis. Revenge trading, and over trading is never a part of a retail traders method, so why do we still do it? A lack of faith or understanding of the method/edge leads to a lot of these bad habits that will consistently ruin a traders P&L.

    Slow and steady, singles and doubles, no need for a home run on every trade. Being wrong is ok, and should be expected, being wrong should be a part of a traders plan, no method is a 100% winner.

    Ideas I try my best to practice, good luck!

  5. Hi Trin -

    When I said "no backtesting possible" I meant that with a discretionary method, it is really, really hard to get an unbiased and accurate backtest. I know every time I have tried, I've (sub)consciously cheated, and gotten much better results than I would in real life.

    So, for my situation, I am accepting the fact that I cannot do a proper backtest. I have ways of working around that...

  6. Hi Kevin,

    How much value would you place on a *forward* test of a discretionary method? I'd definitely say it's got one up on back-testing but, unfortunately, still not sufficient to mimic live trading (as I'm finding out in a hurry since having gone live with my discretionary approach!)


  7. Hi MM -

    I think a forward test is the only true way to evaluate discretionary systems. You can do this in sim or with real money. I guess once you use real money, it really isn't a test anymore! :)

    My next post will talk about exactly how I am going to approach this.