Mechanical Trading Systems: Pairing Trader Psychology with Technical Analysis

CHAPTER 10

Discretion and Systems Trading

Discretion within a Mechanical Framework

Contradiction is not a sign of falsity, nor the lack of contradiction a sign of truth.

—Pascal

The issue of discretion within the context of a mechanical trading system is always a controversial matter, because its inclusion could lead to a breakdown in trader discipline and consistency. During the developmental stages of this manuscript, I debated omitting the topic of trader discretion to prevent a discounting of my emphasis on consistency and discipline in trading. It is to prevent readers from discounting the importance of consistency and discipline in trading that I introduce the subject only after laying the groundwork in terms of the preeminent importance of maintaining a disciplined approach to execution of trading signals.

The market's propensity to experience paradigms shifts and price shock events largely led me to decide to retain this chapter. Excluding the issue of trader discretion within the context of a mechanical trading system could lead readers to be unprepared and/or complacent. Although it may be true that adherence to the principles of sound money management (as outlined in Chapter 8) can allow systematic traders to avoid ruin during paradigm shifts and/or price shocks, this ability to “survive” is probably a suboptimal solution to the employment of mechanical trading systems.