Thinking ‘Three Moves Ahead’

Before I start today’s blog, I’d like to turn to a question Manish Shah, <>, asked. By the way, I’d be grateful if questions are posted to the blog – that way, all benefit. Here’s the question:

I want to ask you a small question. I am not an out an out mechanical trader. But I have a few standard setups that I watch consistently. But there is always a discretion that is attached to the analysis. Is it okay to have part mechanical and part discretionary approach or you advocate a pure mechanical approach. Secondly which markets do you trade/track..

A Q1: Ayn Rand ( ‘taught’ me an axiom that has served me to great stead: words are capable of precise meanings.

I believe that there is a conceptual error that leads to great confusion – the belief that traders are either mechanical or discretionary. In fact there are three types of traders: mechanical, discretionary and subjective (sometimes also called intuitive).

  1. A mechanical trader is one that ALWAYS follows the trading rules without exception.
  2. A discretionary trader is one that has rules among which is a rule that says: “I need not follow my rules”. This allows a discretionary input.
  3. A subjective trader is one that has no rules and trades purely by feel. Most successful pit traders I have met are/were subjective traders. Nowadays, this group is probably represented by the electronic scalpers. I say probably because to date, I have no direct experience to base this assessment.

So, in your case, I assess you as a discretionary trader and of course it’s OK. On whether or not I advocate being a mechanical trader: I believe the mode you ultimately choose is a function of your personality. I would add this: whatever your personality, in your training period, spending a time (even if it is a short one) as a mechanical trader will teach you discipline.

AQ2: I trade Futures: Stock Index, Interest Rate, Soybeans, Gold and Crude Oil



Now to tonight’s blog.

I love to read. Often I find ideas that benefit my trading in works from different fields. I have just completed such a volume: “Three Moves Ahead – What Chess Can Teach You About BUSINESS (Even if You’ve Never Played)”, Bob Rice. So for the next series, I’ll adapt some of the chapters and see how they relate to trading.

In one of his early chapters Rice argues that the ‘goal of a chess or business opening is to create a difference you can exploit later in the game’. I believe the same can be said about trading. What are the important first considerations in trading?

  • Probability of Success of the setup?
  • Normal size?
  • Will the Ebb and Flow affect the normal size?
  • At what price does the scenario break down?
  • What has to happen to remain in the trade?
  • What has to happen to exit the trade?

By developing the ideas ahead of a trade, we prepare for it. In this way, we avoid the trials of impulse trading.

6 thoughts on “Thinking ‘Three Moves Ahead’”

  1. Ray

    I am also a great admirer of Ayn Rand and was fortunate to have received a complimentary Anniversary copy from Saxobank of Atlas Shrugged.

    Published in 1957, Atlas Shrugged was her greatest achievement and last work of fiction. In this novel she dramatized her unique philosophy in an intellectual mystery story that integrated ethics, metaphysics, epistemology, politics, economics and sex. Although she considered herself primarily a fiction writer, she realized that in order to create heroic fictional characters, she had to identify the philosophic principles which make such individuals possible. Unquote

    Her philosophy has touched the lives of many traders, for sure!

  2. I think everyone is an intuitive trader. Discretionary traders add rules, technical confirmations etc. on top of the subjective feel. Mechanical traders are simply discretionary traders that don’t know they are, since choosing which system, when or what type of market or security to use it on, when to abandon or modify it, etc. are all discretionary elements.

    Failing to create a meta system that integrates and constrains the decisions made outside the mechanical component is likely to lead to some objectively bad unintentionally subjective results.

  3. Hi Doug

    Thanks for your post. We’ll have to agree to disagree.

    The essence of the intuitive trader is to take trades without any rules. I can’t imagine Ed Sekoyta, e.g. ever doing that. He may rely on his intuition to generate an idea for study but this is very different to saying he’ll take a trade (or faile to take a trade) against his rules.

    The same can be said for the other elements you mentioned: choosing a system, abandoning or modifying etc. Successful mechanical traders have set measurable benchmarks for these elements.

    If you mean by ‘failing to create etc’, our system needs to take into account our decision-making process and personalities, I agree with that. But for the mechanical trader, that aspect takes place when designing the system not at the point of its execution.

    In my view, the successful mechanical trader is one who follows the rules at the time of execution – he has no room for variation. In short, his execution is governed solely by his rules.

  4. Hi Ray,

    I think we agree but just looking at it a little differently since I would also be comfortable saying every successful trader is a mechanical trader too. I just see anything that produces consistent results as a system, regardless of the sometimes radically different components. Intuitive traders, at least the successful ones, are trading by their rules too, otherwise there would be no way to differentiate a valid signal from a random sensation.

    Great blog BTW. I just got back into trading after a 10 year hiatus and have been amazed at how much quality information is available now (and how much I forgot), and you at right up at the top of my list.

  5. Hi,

    My contention is that there is always an element of discretion in selecting your trades. Suppose one is following 30 markets and there is a set-up in 4 of them..if one has to pick up any two of them there will be an element of discretion in the trade selection.

    One can have a set of rules that can be mechanical. For example buy only if price is above 200 day moving average. It is possible to have a non breakable rule(s) but when it comes to zeroing on a handful of trades it is a case first among equals.
    I am thinking of having a purely mechanical approach to trading for day trading on say 3 min or 5 min charts and at the same time work with discretional system for position trading lasting more than 3 days to 3 weeks.

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