Your Discretionary Edge

It’s more than a year, since I started to do coding and few months since I have coded my first algo trading strategy. I do not like the idea of being defined just by my manual trading - don’t get me wrong, I love trading, I am doing it since 2020 and my passion grows as I am deeper in the trading.

But I think because of that as well, I dove into the algo trading as well and I have to say, that it completely changed my view of the trading overall. So I decided to share with you some of my insights I have discovered on my coding journey alongside with my trading journey.

One of the biggest similarities is that coding is almost identical process of learning, that was also one of my main reasons why I decided to go into it as well. Simply said, coding sucks until it doesn’t. Same with trading. When I started to trade I was just lost. I haven’t had any clue about probabilities thinking, about edge or how markets really work. There is just SO MUCH information everywhere and after all nobody knows what should we be doing or not. It’s all like astrology, just projecting your ideas and hoping it will work. The difference is that technical analysis looks more fancy.

But the main thing I wanted to tell you, is like coding influenced my own trading - manual trading. I have discovered terms like quantitative edge and discretionary edge. These terms are often used when comparing the quantitative finance and manual trading. Quantitative edge is just the opportunity to take over the markets with potential positive outcome based on the data you collected from the past OR with emulators to simulate forward testing (= Monte Carlo simulation etc.). But if you ask someone who really understands trading if discretionary edge exists, he should answer that yes, it exists as well. There is no quantitative proof, but it exists.

So how would we define discretionary edge? Discretionary edge for me is the ability to connect to your experience storage of your brain and unconsciously act based on the data you can’t interpret and can’t describe. In trading industry it’s often called “gut feeling”. No, the trading out of boredom or trading just in order to take position is not gut feeling. It’s your gamblers fallacy showing off. Gut feeling is the state when you are truly in the flow. Professional poker players know that. All people who love the job they do, know that. It’s just simply following your “built instinct” to act as you feel like. So yeah, what I wanted to say, that last few months I am trading fully discretionary, not too many rules I follow, only rules for my trade management, which is very simple, but without that I enter in positions I feel like could be good. And I have to say, it is one of the best decisions I have ever made in my trading career. I often felt like rules are chaining me to the ground that I can’t trade as I could, so I have broken the chains and do it that way.

But the way to discretionary trading is very long and it can’t be built in the few months, it is equal to your chart time, your live market experience and also connected to risk management understanding. Can’t really say if anybody can do it, not everybody is professional poker player nor trader, but people like this exist.

- Luke FT.