Adapted from a discussion on the merits of discretionary vs. mechanical trading.
...Tunnel vision can lead to a form of voluntary blindness. If you are focused tightly on a single frame of reference for the markets, everything will be filtered through that frame, thus limiting your ability to gain broader understanding. If you view everything through one predetermined filter, points of view outside that filter may sound like they are in a foreign language, when in reality they simply represent a different way of viewing things.
To believe that discretionary traders have no advantage over systematic (mechanical) traders is illogical on its face, not supported by available evidence. It's already been pointed out that most (though certainly not all) of the biggest and best traders in the world are primarily discretionary. Experienced observers like Jack Schwager (editor of the Market Wizards series) have noted that the traders with the most amazing track records and reward to risk ratios tend to be discretionary, with mechanical traders inhabiting a successful but far more predictable space.
When you focus on a specific market niche, it's a more defined task -- there is no immediate harm in ignoring the rest of the trading world (except when it rudely intrudes on you). When you try to comprehend and internalize the full scope of things, however, and seek to understand the market itself on a core level, it's a monumental task. Sort of like an entomologist learning about the life and times of the carrion beetle (niche) vs. attempting to understand the workings of an entire ecosystem (total picture). Major, major undertaking.
But the potential rewards are monumental too. If you succeed, many paths are open to you that are closed to others, because you have formed an intrinsic grasp of how the market works and, by extension, the how and why of multiple trading styles.
With this versatility you can do many things. You can shoot for astronomical returns or hone your risk management to perfection; you can be a trend follower, a swing trader, a day trader, a value player, an option spreader, or any combination thereof, because you understand the intrinsic reasoning behind each. The doors are flung wide by direct access to internalized knowledge, and you are trained and equipped to consistently expand your knowledge -- the opposite of the tunnel vision mindset.
Oh, and you can do something else systematic traders can't: directly leverage your brainpower through the use of computerized systems. The human brain still makes the supercomputer look like a joke when it comes to the intuitive process of making connections and interpreting subtle variables.
The discretionary trader can create a mechanical methodology for trade management if so desired, and then focus on signal evaluation and asset allocation (which signals to take, which to pass up, how much risk to absorb, etcetera). Entry and exit aspects can be automated to varying degree, allowing for more focus on probability distributions, fundamental research, reward to risk scenarios, and the like.
When full understanding is employed, mechanical systems become just another tool in the toolbox; accessible but not overarching.The discretionary trader can do most everything a mechanical trader can in terms of systematic implementation, and still have the advantage of active management via trained mind on top of that. Mechanical horsepower plus a rocket pack to boot.
In contrast, the purely mechanical trader deals with an electronic ceiling. If all your decisions have to be run through a computer program, the upper limits of your system will be determined by the limits of that program.
There are a range of inputs the mechanical trader no longer has access to, value-added decisions that can no longer be made, when the full focus is on training a machine. Of course, these inputs may be seen as useless, but that's a chicken-and-egg thing. The resources mechanical traders ignore do not have value to them precisely because they haven't built a process for making use of them. (Like beauty, information value is in the eye of the beholder.)
But oh, the mechanical traders say, the removal of human emotions (fear and greed) makes up for the inherent limitations of subservience to a computer.
Maybe; not necessarily. That's only true if you feel it's necessary to circumvent your emotions, rather than understanding them and ultimately harnessing them.
Speaking of which, why is it assumed mechanical traders automatically have a fear and greed advantage?
On the one hand, you have a trader who has developed a computerized system in large part to avoid dealing with unpleasant emotions. The fear and greed are still there... just a step removed. When a string of losses comes, the pain is just as real. When the mechanical trader is frantically wondering whether the system is degrading, or whether significant changes need to be made, there are still highly emotional choices to make.
But, from the classic mechanical perspective, destabilizing emotions are not meant to be confronted head on... after all, avoiding them is one of the reasons for going mechanical in the first place! (I'm fully aware, by the by, that there are emotionally grounded traders who simply prefer the puzzle-solving aspect of mechanical systems. This argument is in response to those who say that "removal" of fear and greed via mechanical process is superior to old fashioned emotional control.)
On the other end of the spectrum, the discretionary trader is forced to consistently deal with emotions on a regular basis -- to analyze them, interpret them, know them intimately, guide them and direct them. Who, then, is going to have better internal understanding? Who is going to have a more nuanced sense of emotional control? Who is going to better understand how to use their emotion as an advantage, a value-add, a positive force? When things get ugly, who is less likely to panic?
And who's to say that a versatile discretionary trader can't execute more consistently and fluidly than a mechanical trader can, given the avoidance of emotion on one hand vs. mastery of it on the other? It ultimately becomes a question of character, psychology, knowledge and will... all areas that are continuously fine-tuned and developed in the qualitative discretionary process.
