Trading with Rules and Intuition

I always chuckle at the old saying “Trade like a robot”

Why would you want to trade like a robot?

If you have a systematic strategy that has zero discretionary element to it then get it coded up and have an actual robot trade it for you!

A robot doesn’t need the bathroom, a lunch break, or sleep…

I know what the phrase is trying to say right – you should trade your rules in a systematic way without emotion or second guessing.

The problem with that is you lose a key part of being a human trader.

And humans have major advantages in a lot of areas:

1. Flexibility and the ability to adapt.
2. Ability to leverage intuition and experience.
3. A better understanding of market psychology.

That gives us a certain edge that even the best trading robots struggle to replicate.

The sweet spot is probably a combo of the two.

Iron discipline, a rule-based trading plan.

PLUS

An element of discretion and flexibility baked into that plan.

• A context filter
• A price action trigger
• The final say to enter lies with you the trader

Bad analogy alert here, but it’s the best I’ve got on the fly…

Think of a nuclear weapon. (Stick with it!)

A nuclear weapon has a whole raft of protocols, systems, rules, and automation.

But that final decision to pull the trigger rests on a human.

Why?

Because we need to have that final say in something so incredibly important.

Things like…

#1 Avoiding false alarms – humans can pick up on all data points and make a better judgement on the nuances than any robot.

#2 Further consequences – an automated system isn’t designed to think of the consequences of its actions, it just does what it’s told.

#3 Complex decision making – There’s so much to consider outside of an IF THEN statement. You’d need to pre-empt every single variable, which is almost impossible.

(And yes I appreciate buying a 30 lot of ES is nothing like making a decision to launch a nuke… but you get the idea.)

Humans are just better at making complex decisions.

Back to trading.

I think there are 3 ways to go as a trader:

Fully systematic – You have strict rules for entry and exit, you never deviate and everything is laid out in a simple yes/no structure. You can either trade this manually or automatically.

A perfectly acceptable way to trade a strict edge.

Fully discretionary – You have no rules, and you just take the trade you feel like taking.

Ok, but with no structure, it’s easy to get lost.

Hybrid – You use rules and systems to help guide your trading, but add a discretionary element to the mix.

A potential sweet spot?

I think they can all work…

Each has pros and cons.

I like to trade a mixture:

• Setups that are totally rule-based (usually built from some market observation)
• Setups that have rule-based filters, but that final trigger decision lies with me

They sit in separate buckets, accounts, and head space in my mind.

I don’t worry about the nuances of the rule-based system, it’s a yes/no process.

Similarly, with setups that have discretion, I trust myself to make the best decision I can with the information I have at the time.

Very separate approaches.

You don’t have to marry just one, but I do think you need to define your method for a specific setup or strategy.

Worth some consideration in your own trading business.