Lesson 2: Why Graybox Strategies

Lesson 2


It can help to understand why graybox trading can be superior to both systematic and discretionary trading to help motivate and clarify your focus. 

  1. It is impossible to trade your entire knowledge without systems. I recommend jotting down every strategy idea you have in a journal. I am currently using for this. I know there is a risk as it is cloud based. But, at my current level, it is not a concern yet. If you study the market and record your ideas over time, you will find that it would be impossible to trade all your strategy ideas without systems. The only way you can take advantage of your full capability and insight is to build systems. If you're not getting the results you seek then it is probably because you're not trading your best insights!
  2. It is not about certainty of making money but about confidence. No one can say what the performance of any system or method will be in the future. Mark Melnick @ T3 Live talks about "psychological toxicity". The truth is that entirely discretionary trading is highly prone, regardless of skill, to high psychological toxicity because you never know for sure whether you lost money on a good trade or a bad trade. The truth is that it is easier to gain the trading skills then having the confidence to actually trade.  There are two game changers that can help you overcome this. The first are e-micros @ 1/10th size e-mini contract and second is  hybrid trading with BeyondBot. Hybrid trading can give you the confidence to trade like you know is possible. 
  3. Discretionary traders tend to be great at what the computers are terrible at and computers tend to be great at what discretionary traders are terrible at. Discretionary traders tend to do better at reading general market conditions or "big picture patterns" while systems are better at specific patterns or waiting for specific conditions.

    There are 4 basic areas where a discretionary trader can develop an edge:
    1. Bias. The trader knows where the market is likely to go in the near term. This is most often developed through tape reading the order flow with specialized tools like my own AlphaReveal. It involves reading and seeing microscopic patterns in supply and demand and big picture patterns.
    2. Price. The trader is able to identify excellent prices to do business at. This is often the result of pattern recognition and understanding participant psychology.
    3. Thesis. The trader is able to understand a factor that drives the market and makes it more prone to do one thing as another.
    4. Synthesis. Combining one or more of above edges.
  4. Systems tend to be great in areas where discretionary traders are weak or simply cannot compete due to physical limitations or offer phenomenal power over discretionary trading and include all of the following:
    1. Execution speed.
    2. Trade selectivity.
    3. Discipline.
    4. Consistency of execution.
    5. Identifying specific patterns.
    6. Stamina, endurance, basically ability to watch the market 24/7.
    7. Breadth and ability to watch multiple markets 24/
    8. Efficiency. It takes minimal energy/time to run an automated system compared to discretionary trading.
  5. Nothing is impossible but some things are very difficult. One way think about it is that if you had the software engineering and machine learning team that made Google self-driving cars, you could probably build a fully automated strategy that could do anything you wanted. Without a team of developers and specialists, the easiest way to get similar results is to program what is easy and use your trading experience and skills to do the parts that would be hard or impossible. You might even get better results as companies are still pouring millions into self-driving cars-- something people not perfectly but fairly well. The logic simple: let the computer do what it is best and you do what you are best at.
  6. It is not even always about edge. Some strategies you develop might have limited edge. I call these priors (based on a prior assumption) or invariants (some parts that don't change). Why are prior and invariants important for gaining consistency? Because they take the self-doubt away and help you to execute. If you can read the market and you have a setup you can execute with algorithmic precision then you should have greater confidence and ability to replicate your market replay results in the live.
  7. Frees up your time & the mind. Most discretionary traders are suffering from information overload.Once you have a system automating and reducing the workload, you can start to focus where you really do best. You will start to see more patterns which feed back into your journaling process and develop into new and improved systems.  
  8. More realistic approach then trying to rigidly follow a system.  How many times have you developed a system and then found the results disappointing going forward?  The market changes. Sometimes systems work for years and other times mere weeks.  A more realistic approach is not think the system broke but to recognize what's working in the market can shift over time and ebb and flow. Is taking a break even stop optimal? If you know your system reaches profit target, no it is almost never optimal. However, without certainty that your system works it may be better to sacrifice perfection to stay in the game.
  9. Use discretion at level where it makes sense. BeyondBot supports may forms of graybox trading and what's nice about this is that it recognizes different systems can be improved or traded with different techniques. I have often thought trading success often comes down to finding your comfort zone. Conversely, trading failures often result when we end up executing outside our comfort zone. With benefits of price restrictions, managed or automated exits, automated entries, ability to arm/disarm strategies, and change tier size BeyondBot gives you great flexibility and freedom of expression while giving you ability to benefit from systematic methods.