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This is going to be a thread on Systematic Trading from whatever I have experienced. @madan_kumar and a friend of mine (who's a HNI system trader managing about 70Cr of his own money) have been huge inspirations for me to take up the systematic way of trading.
This thread is a beginner (1-3 years in market) view of systematic trading and the merits/de-merits.
If you're starting out in trading, you're better off as a systematic trader than as a discretionary trader. Reasons below.
1. The most successful discretionary traders I know - have all blown up their accounts atleast once, some twice thrice. Their discretion comes from market experience. And even the Prop Trading firms I know where there are discretionary traders, have a specific gestation period.
2. The gestation period from all the successful discretionary traders I have spoken to, and interviews I have seen - is at least 5 years. And this is for "successful" discretionary traders. 95% of all traders fail, and I think this is more pronounced in the discretionary space.
3. Within those 5 years, if you persist, you'd have either blown up once or twice, and if that doesn't deter you, you'd be psychologically wrecked too. Discretionary trading makes you take a hard look into your spirit and exposes you for who you are.
4. Discretionary trading may sound like it requires a lot of discretion. But the most successful discretionary traders I have come across, trade a set of rules/setups that they have gathered in their experience.
5. Discretionary trading is NOT throwing darts in the dark, trading whatever you feel like. It may start off like that for amateurs, but the ones who eventually become successful become the type of people in no.4.
6. The methods of discretionary traders may differ, but they all eventually resort to following a set of rules, and in that way, they are also systematic traders only. Just that only part of their system can be codified in an algorithmic format, and part of it is dynamic.
7. The dynamic part - may involve monitoring the DOM, price ladder, Open interest, news inputs, market sentiment, correlation between different markets/indices/stocks, etc., these things require advanced deep learning level machinery capacity that normal people don't have.
8. That is the wonder of human brain. When you are persistent and have traded for years, whatever huge machinery can't accomplish - your brain accomplishes, by establishing neural pathways for you to subliminally understand what only best data scientists can do with huge machines
9. Why is it not prudent for beginners to start off with discretionary trading? I'll first discuss this and then go to why systematic trading.
10. The first obvious reason is because of the dynamic part i mentioned in 7 & 8. Even the best deep learning algorithms take days to train and some take weeks to have higher level of accuracy - whatever the task may be.
11. Without training on such huge volumes of properly cleaned up data, it's impossible for machine learning to render itself useful for any task. So, if you think you can trade at your discretion from the get go, you have the highest odds stacked against you.
12. Unlike machines, it takes atleast 5000-7000 hours of exposure to charts, dynamic market movement, watching price action, open interest, and other dynamic changes in market. 250 trading days, 6hrs per day, 1500hr/year - so atleast 4-5 years for you to develop decent discretion
13. So, you have to have the stamina to sit with your trading terminal day in and day out - for 5 years. Even then, paper trading won't help coz that would mislead you by missing the psychology part. But that's better than nothing.
14. That said, how many people do you know can spend 6hrs/day for 5 yrs, every trading day without fail, sitting at terminal, watching charts, taking the data points in, and developing discretion, and understanding of market microstructure - complementing with reading that aids?
15. The best way to go about it would be to have decent capital that you can pay market as tuition (as you'll certainly blow up) and show up every single day and put in the work. You hear 95% of traders failing, coz those 95% can't take this. It's painful, and wrecks you.
16. Why do the best prop firms give preference to people who have played sports in some competitive format? Or someone who's shone in some level of national competition? Coz it takes a lot of guts, resilience, stomach and will power to go through this journey. Not for avg Joe.
17. Market has a way of weeding out the weak ones, and giving riches to the strongest of hands. If you don't give up due to blowing up or losses, you'll give up due to the sheer inhuman effort it takes to become successful at discretionary trading.
18. To say that discretionary trading in your formative years as trader will break you psychologically, emotionally, mentally, and spiritually - is an understatement.
19. The most impt psychological aspect that hinders your progress as a disc., trader is how you were brought up. Remember this rule always.
Rich get richer. Poor get poorer. Middle class almost always stays middle class.
Rich get richer. Poor get poorer. Middle class almost always stays middle class.
20. Reason for this is: The rich have abundance and growth mentality. The poor have poverty and lack mentality. The middle class have conservation mentality. This is why people who are already rich - when they enter trading - they are better off psychologically and see gains.
21. The reason they see gains initially (and continue to, if they acquire discipline) is because they attract what they believe in. They believe in abundance and growth, they attract the same for their account also.
22. Someone who grew up with poverty/lack mentality will most likely quickly blow up his/her account. This is because they attract their belief of not having enough or the belief of having lack of money. The universe gives them that lack that they believe in by blowing up.
23. People from middle class - either grow up with a lack mentality or a conservation mentality depending on their upbringing. If they always grew up being told to be safe/secure, be grateful for what they have, and don't desire too much, that's what will happen to their account
24. You can often find these people trading, making profits, and then coming back to breakeven. They do this multiple times, either to get frustrated and give up, or to face their inner demons of faulty upbringing, beliefs that have to be unconditioned, to grow as traders.
25. Those from middle class, whose parents brought them up telling them there isn't money, there isn't adequate money for food/clothes or basic necessities even though they did okay, will inevitably go into losses, even if they don't blow up.
26. Some are brought up being told that rich people are evil, they are corrupt, and it's not possible to get rich without doing something morally bankrupt. Some even look down upon trading as a worthless profession adding no value to society. This reflects in their performance
27. If you believe rich people are evil/corrupt, and you have a self-image of yourself as a good person, will your beliefs let you become rich? There's a belief clash, and the dominant belief stays - you'll stay a good person, but you won't get rich.
28. Growing up, I saw few rich students being assholes in my school, and that thought stayed in my head, and I found myself losing in trading, until i sat and thought why is this happening and found that I believe rich people are assholes and have been attracting such people.
29. As you believe in something, the belief gets stronger as it attracts further incidents, experiences that will strengthen your belief. So, discretionary traders often get messed up between the desire for money and the attitude they have about getting rich/being rich.
