Finding the Right Blend

Sean McLaughlin
July 31, 2024

What do you call a blend of systematic and discretionary trading?

Systionary trading?

Discretionatic trading?

I think I’m leaning towards the latter.

Early in my trading career, I started up a small commodity futures hedge fund and prided myself on being fully systematic.

An algorithm derived the signals, I entered each trade manually, and I honored each signal religiously. To my credit, I stuck with it, no matter what. And I was rewarded for doing so, earning my investors 58% net returns on their money (net of my 2/20 performance fees) in just 18 months.

So, it was ingrained in me early on that systematic trading was good for me. It kept my emotions out of the decision-making process.

I’ve been chasing the systematic dragon in index options trading ever since.

The results have been mostly disappointing. I’ve had great runs, but nothing consistent that lasted longer than a 3-4 month period. And nearly every positive run was followed closely by a giveback of the majority of my hard-won gains (or worse), time and time again.

Many times, I’d be sitting in large open profits feeling I should take some off the table, but I’d hold in service of “being true to my system.” And true to form, if I’d followed my hunch, I would’ve been better off. “But I stuck to my system!” I’d foolishly tell myself.

So over several years, the only winner has been my broker, who’s happily collecting my churning commissions, earning the steady returns I’ve so desperately been trying to generate for myself. (You’d think they’d at least send me a fruit basket.)

There’s nothing wrong with only being a systematic trader.

Neither is there anything wrong with being focused solely on discretionary trading.

There are many successful traders in both categories.

But maybe what works best for me is a blend of the two disciplines?

In recent months, I’ve noticed that I’ve performed best when I mostly rely on my algorithm to get me into positions, but then use technical analysis and just plain ‘ol gut instinct to time my exit – escaping with a vast majority of my open profits before getting whipsawed in the reversal.

I’m writing all this as a reminder to myself to not be so damned dogmatic!

Neither the trading world nor the real world are so black and white. We need less EITHER/OR and more AND.

There’s room for both technical analysis AND fundamental analysis.

There’s room for sentiment analysis AND price analysis.

There’s room for Democratic thoughts AND Republican thoughts.

Houses can be homes to both cats AND dogs.

And my trading can be a mix of both systematic AND discretionary signals.

What are you being dogmatic about, and might you benefit from exploring ideas from the other camp?

Let me know, I’d love to hear about it.

Sean McLaughlin | Chief Options Strategist, All Star Charts

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