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Discretionary Trading Challenge

Discretionary trading is hard and this is one reason it is being abandoned and replaced by systematic trading. Below is just an example of a trade from last week.

One of our mean-reversion strategies (MR1) generated a long signal in SPY at the close of last Friday to be entered at the open of following Monday. Given all the market uncertainty at end of last week, including impact of Irma and North Korea, it is highly likely that more than 90% of discretionary traders would have avoided this long signal, which is shown by the last green arrow in the SPY chart below:

This turned out to be the fourth most profitable signal year-to-date for this particular mean-reversion algo with a gain of about 0.82% (actually it will be closed at the open of today.)

Obviously, one could attribute the gain to luck. But there is overwhelming evidence that a large percentage of trading signals of various types of strategies are generated during an “inconvenient period”, for example before major economic releases, earnings reports, and more importantly during periods of market uncertainty. Many traders look at the hypothetical performance of their strategy at the end of the year and realize that their actual performance is nowhere near it, or in some cases it is even negative. The main reason for that is that discretionary trading is difficult. The only way to enforce discipline is by automating execution.

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Charting and backtesting program: Amibroker


Technical and quantitative analysis of Dow-30 stocks and 30 popular ETFs is included in our Weekly Premium Report. Market signals for longer-term traders are offered by our premium Market Signals service. Mean-reversion signals for short-term SPY traders are provided in our Mean Reversion report.

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