Who to trust: the machine, or me?

Who's smarter - computer or user?  Source: Google Images.

Who’s smarter – computer or user? Source: Google Images.

I suppose it’s a common refrain among newer systematic traders (i.e. those who prefer to have a programmed computer trade on their behalf): when is it OK to override the system I created?

This is particularly on my mind this week, as the volatility of global markets in the first few trading days of 2015 has been a mix of good and bad for my trading system:

  • The good: higher volatility, combined with strong trends (I’m looking at you, oil and euro) has meant several winning positions for my relatively simple momentum system.
  • The bad: despite some decent trends, there have been pretty good reactions/whipsaws in other markets (including equities and bonds).

So here’s my thought process, in the heat of battle, as it were:

  • Rational side: I’ve created a robust system, without fiddling too much with parameters (learning lessons from others).  It works in backtest, and has worked since live trading.  Just keep away from it.
  • Emotional side: I was up $xx in my S&P position, but am now up 75% of $xx.  The trend *looks* like it’s reversing.  Better to get out now, rather than await the inevitable close by the system.
  • Result: A few good discretionary closes, saving a decent chunk of accumulated gains/avoiding loss.  Set against that, a few other discretionary closes led to a bad outcome – fear of missing out.
    • Say I closed a trade in oil, just to see the price continue its downward trajectory.
    • The system wanted to stay short, but I exited early.
    • I get mad at my decision, so get back short at a lower price.
    • The oil price finally does reverse, vindicating my earlier decision to close out early.  But now I’m stuck with a position (that the system still wants, btw) that I don’t want.
    • I close this second, losing trade, again mad at myself for the whole scenario.
    • Overall, these losses offset a decent chunk of the profits saved by discretionary exits.

What to do.  I guess it’s back to work on my system’s exit logic – hopefully my idea for closing out earlier doesn’t completely screw up the system’s profitability.  Regardless, I’ll learn more.


One thought on “Who to trust: the machine, or me?

  1. “It works in backtest, and has worked since live trading. Just keep away from it.” vs. the emotional dilemma, oy. A lifelong struggle.

    This is great, thanks for sharing your thought processes. Love your writing!


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