Reader Question on Trading Systems v. Discretion (Prop Trading)

This is a question that has come in from at least a dozen readers recently in one form or another. I have summarized my responses to address all of the related questions.

Things are seldom what they seem, Skim milk masquerades as cream. – William S. Gilbert

Q: Can i ask why you have moved away from being a fully systematic trader? I feel that it would help in my understanding given that you are someone who has been successful systematically and yet do not remain fully systematic.

A: Mechanized systems serve a purpose, but are not the end-all or panacea. Using or running a “system” depends on what your personal needs are: the system is to serve you, not the other way around. If you want to, you can learn to trust yourself and trade on a discretionary basis. I know MARKET WIZARDS who regularly jump on and off systems…


They are good vehicles to learn trading.
They can help you catch some of the trend, but not all of it.
You must have the highest degree of discipline and integrity to run your system faithfully.
They are good for including many markets, and not just your favorites.
They can help you calculate position size, entry, and exit.
Can regiment consistent, small losses if programmed for such.

Disadvantages and Misconceptions:

Knowing how to trade a system does NOT make you a professional trader.
Knowing how to trade a system does NOT put you on the same level as a professional trader.
Having a system does not mean you will raise capital.
Running a system does NOT mean that you operate on a higher level of trading.
Having a system does not mean that anyone is going to care about you and your trading.
Systems are late to the game and give back a significant amount of paper gains.
Systems annul a trader’s intuition and innate ability to trade, if it exists.
Include far too many markets to become an expert in any one of them.
Price tells you a lot, but it does not take into account outlier events – good or bad.
Price does not tell you how other traders are positioned.

Today’s Environment

The reality is that we are in very difficult times for new or emerging commodity traders and CTAs. There is a big catch-22 in the market now. Might as well be called Catch 32, b/c that’s what you need in AUM to get an allocator’s attention: $32 MM under management PLUS a 3-year track record.

Most of my friends from growing up do not run mechanized systems. They’ve traded on the floor and “upstairs” and are generally specialists in one commodity – cocoa – or a sector – such as the energies. One good public figure in this realm is Eric Bolling. He traded Nat Gas spreads his whole life. Other traders I know traded Crack Spreads or were cannon-ballers in the Softs.

Other guys I know from the Nat Gas pit couldn’t tell you the difference between the S&P 500 and the Daytona 500. That means they didn’t know what the cash market S&P closed at from day to day. They were entirely focused on one commodity and they are worth 8 figures.

The most important thing I can teach anyone is that running a system is not the only foray into professional trading. As of this writing, I know of more places looking for a professional crude oil trader than I know those looking for new CTAs to allocate to.

That probably flies in the face of what everyone has read, but it’s the truth. In fact, a prop firm or hedge fund is not interested in your trading 25 commodities…but they’d be especially interested in your 2-3 year audited track record trading gold or crude oil though.

Your need for a system depends on what your goals are. If you want to try to be self-employed as a trader, gather assets, and become of member of the NFA, then learn to create system. Set a goal of 12% RoR per annum with no more than a 3-4% drawdown. Most of the people I’ve mentored or taught are very bright, but they are not marketers and that’s how you gather assets, and that is the pink elephant in the room.

If you want to trade on a prop desk or at a hedge fund, become a specialist in one commodity or a sector.


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