Disccretion vs. System or Mechanical or Algorithmic Trading

        
Please bear in mind that altough my blog focuses on systems or mechanical or algo trading, it doesn't mean that I discredit discretionary trading (meaning you evaluate and decide on each trade, some like to call it gut feel).  The best system traders so far can't beat the best discretionary traders such as Paul Tudor Jones or George Soros!  If you are hoping to turn 10K or 20K into millions in a short time (1 or 2 years), then you can forget about going mechanical trading.  No systems on record so far can match the best discretionary traders.  Therefore I do not wish to go into the endless debate about which is better.

I prefer system here simply because it is the scientific way, objective, clear and reproduceable by anyone, quantifiable and verifiable by anyone, can be extended to trade multiple markets and multiple time-frames in the future, consistent and void of human judgement, opinions, emotions and biases (while trading). 

In my opinion, there is not much difference between the two.  In fact, in the early stage of system development process, a lot of discretion or the art portion of trading is involved (that's why I say even system trading is an art).  For example what strategy to use, how do you use it, is it sound, can it stand the test of time, whether to use filters, the parameters to be chosen during optimization, what about stops and exits, the balance between chosing most profitable or most robust systems etc.

The analogy I often use is the process that the pharmaceutical companies go through before the drugs that they design, develop and test become the medicine we take.  Would you take a drug that has not been clinically (scientifically) tested (usually more than 10 years)?  If yes, then it is just like putting real money to trade before a strategy or plan is being formalized or being tested as having an edge (discretionary trading).  It is based more on blind faith and luck alone at first and hope that you won't be financially ruined (some traders gone through a few times) before you gain your trading insight.

After such a long intro, I would start to discuss the things to look for in a performance summary report and what they mean in my future postings.  Then I would start to show you the simple steps in designing, developing, testing, evaluating of trading systems and the detection of possible leakage while doing live trading.  Until then, happy trading and good luck!