Experience, Mathematics and Discretionary Trading : Why a Mentor is Vital When Doing Manual Trading

I have always thought that one of the most important aspects for success in forex trading is to understand and completely know the expected profitability and especially the expected draw downs of the systems or techniques we are using. In automated or mechanical trading this seems pretty straight forward since simulations allow us to have a good idea of how our system behaved in the past (if the simulations are done in a reliable manner) while in manual trading it is quite a mistery how this is exactly achieved. If you are trading a discretionary technique in which there is no “mechanical set of rules” perse, then it becomes very hard to know the expected profit and draw down goals you should have in mind. On today’s article I will share with you what I have found out when speaking to manual traders (those who failed and those who succeeded) and what they use to achieve this “determination of system characteristics” which is so necessary for long term success.
Although it seems that mechanical and discretionary techniques are too completely polar opposites it is clear that both of them seek exactly the same thing : to have a clear mathematical edge so that profits can be extracted in the long term. The problem with manual trading here is that measuring this “edge” is extremely difficult since the trading mechanics are blurry and there is no way to systematically apply them to the past. This is precisely one of the reasons why manual trading for most people is so difficult and only a handful eventually become profitable discretionary traders. The problem here is that you cannot know if what you are doing is “right or wrong” since evaluating, trading and coming to conclusions is a slow and seemingly masochistic process that ends with the realization of a mathematical edge and adequate profit and draw down expectations.

After talking to many manual traders during the past few months I have come to realize that those of them who succeeded quickly had something very simple in common : a successful mentor. When you are using discretionary trading the only way in which you can “cut the road” and gain an idea about the mathematical expectancy of the discretionary method and its intended profit and draw down targets is if someone who has already gone through the whole experience guides you through the process. New traders are taken under the wing of a successful manual trader have the advantage of counting with his/her experience which counts as a “trading record” that already shows evidence of what works and what doesn’t and what has seemingly shown a mathematical edge in the past.

Manual traders who are not this fortunate seem to go through a very painful road that seems to have two main options. Either the trader becomes completely mechanical and decides to use systems which can be defined and simulated in computers to get the draw down and profit targets needed for success or the traders decides to take the discretionary road in which these targets will only become apparent after long periods of time (what seems to be an average of 5 years).
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It is however good to say here that this doesn’t make automated trading or even the trading of mechanical systems in a manual way any easier than discretionary trading. Even though both roads eventually seem to lead to the realization of a positive edge and long term profitability in the market the truth is that both of them require huge amounts of work and a lot of effort. They both have similar psychological traps and both make the journey as hard. As a matter of fact achieving a certain level of average profitability in the long term with an algorithmic trading system is just as hard as doing it with discretionary trading although both roads are difficult in different ways. In both method people will fail incredibly in the beginning and success will only come when a deep understanding appears.

In both ways of trading your chief opponent is yourself and your ability to tackle the psychological issues related to trading will be vital. However it seems that when people are venturing into the world of forex trading through a discretionary path having a mentor seems to play a huge difference. Interestingly enough -from the number of discretionary traders I know- about 1 in every 20 has been profitable for at least 5 years and all of them had a mentor who taught them how to be profitable in trading. It is easy to note that this “passing of knowledge” makes new traders “take a leap” and gain many advantages that other traders who may attempt to become successful without a mentor do not have.

So my advice here is also pretty simple. If you want to become a successful manual discretionary forex trader, find someone who has already done this and get an education from him or her, it will save you a lot of money and it will give you an edge the bast majority of new traders do not have. If would rather become a mechanical trader using sound systems you completely understand with clear draw down and profit targets please consider joining Asirikuy.com, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach to trading systems. I hope you enjoyed this article ! :o)

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2 Responses to “Experience, Mathematics and Discretionary Trading : Why a Mentor is Vital When Doing Manual Trading”

  1. Gabor says:

    Hi Daniel,

    It seems to me that profit/drow down targets of discretionary traders are much the same then that of the mechanical traders. That is even the best discretionary traders can be in drawdown for many months and cannot achieve better average compounded return then 2-3 times of his/her worst drawdown.
    What do you think about that? You probably have seen more track records than me.

  2. Daniel says:

    Hi Gabor,

    Thank you for your comment :o) I do agree with you in that discretionary traders are bound by the same limitations regarding profit and draw down targets as mechanical trading systems.

    In the short term – as with mechanical trading systems – it might seem that they can achieve much higher profitability to draw down ratios but in the long term they do reach the same point.

    I have to say that I am yet to see the track record of a trader who manages to go beyond a 1:4 maximum draw down to average compounded yearly profit ratio (with at least 5 years).

    I hope this answers your question :o) Thanks again for your comment !

    Best Regards,

    Daniel

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