Best of TTU – Simplicity is the Ultimate Sophistication

A few years back, I had a great discussion with die-hard Trend Follower, Scot Billington.  I would like to share some key moments with you, including how to perceive past track records, and also some of the differences between the long side and the short side.  If you would like to listen to the full conversation, just go to Top Traders Episode 25.
Deciding between Systematic and Discretionary Trading
Scot:  ...I started putting together a trading model. In my opinion, they were three big picture decisions that somebody had to make when you talk about what kind of trader you are going to be. The first was discretionary or systematic and mechanical.

So I would define discretionary as I bring in different inputs, whatever those inputs might be. I weigh them in a non-standard fashion, meaning that I don't weigh them necessarily the same way every time. I might bring in the same inputs, I might look at different ratios, but sometimes input A overwhelms input B, and sometimes input B might overwhelm input A. Regardless of what that might be, and then I would make the trade decisions in that fashion. Systematic I define as I do the exact same thing every time. I might argue that, if you have any discretion, then you are discretionary. So that even if I have a mechanical model, but I decide 7 times a year to override it, I suspect those seven times a year are going to be 7 of the more volatile and the larger outcome periods, and in essence you have a discretionary model, which is fine but you are a discretionary trader.

"The primary reason that we wanted to be systematic is that we felt like we wanted the emotions taken out of the trading process."

The reason that I and we have gone with systematic is three-fold. The first is that we wanted something that the efficacy of which could be at least estimated through historical modeling and backtesting and the like. So if I'm a discretionary trader, one of the difficulties that we found was how do I know that my theory is accurate? I think that XYZ, whatever XYZ is, it might make perfect sense, but what I have there is a good hypothesis that will be interesting to test, but I really have no method of testing it. Therefore, no way to prove that at least my idea had worked in the past. The second reason that we went with a more systematic model is that we felt that it would be much easier to apply to a wide variety of markets. If I was going to be..and that also ties into the inputs we might use...but if I were going to be discretionary, and I was attempting to trade the Yen and cotton, it would perhaps be very difficult to be an expert in both of those two markets. Now you could be discretionary and not necessarily have fundamental inputs, but that will be the second part of this answer. The primary reason that we wanted to be systematic is that we felt like we wanted the emotions taken out of the trading process. We wanted something that was repeatable, so that I could say the same decisions that I made in June of 2004 I'm going to make in December of 2018. It's the same process. It's a much more repeatable process than my weighing all these different factors. The other thing is that we think that it's...I don't know about impossible, but extraordinarily difficult to separate your decision-making process from your own emotional state at any given time. I think it's probably a bit fanciful to say that I would make the exact same decisions on the day that my wife left me as the day that my son won an Olympic gold medal. (This applies) also within trading: If I've just had 4 straight up 15% months I think it's extremely difficult to bring the same analysis as if I just lost...if I'm in the middle of a 30% drawdown. What we basically said was that my wife has just walked out on me should not have any effects on the trades that I take.

So the second thing that we looked at was what kind of timeframe are we going ...