The Basics

Is there such thing has hybrid trading?

Hybrid trading is purportedly a combination of mechanical and discretionary trading, but I’d say discretionary trading can easily have mechanical elements.

decisionPhilosophical question: If you trade partly in a mechanical fashion and partly in a discretionary fashion, are you really trading mechanically at all and not just discretionary?

I ask that question after re-reading an old article on the subject of hybrid trading, which is described as combining mechanical and discretionary approaches. The piece takes the view that mixing the two approaches can serve to counter the issues which each of them have individually.

In terms of the mechanical approach, the advantage is suggested to be that such systems provide very clear signals and thereby reduce the opportunity for psychological issues cropping up to derail our performance. On the negative side, however, sometimes mechanical signals can completely conflict with the market view we’ve developed. Whether that’s a bad thing is open to interpretation, though. 😉

The reported advantage of discretionary trading is that it allows us to trade in a way which may better account for current market situations. The short-coming, though, is that such an approach can be subject to psychological problems, as well as a simple lack of market understanding.

The article goes on to basically describe hybrid trading as being an approach in which the trader decides which signals provided by a mechanical system they will take and which they will ignore. Doesn’t this basically sound like a bad implementation of a mechanical system?

Personally, to my mind if there is any kind of discretionary element to the trading process, particularly with respect to entry and exit, then I consider it a discretionary approach overall. This does not mean there can’t be mechanical aspects, however. There certainly can.

In fact, many discretionary traders are mechanical in the way they approach things like position sizing and risk management. Setting trade account exposure at 1% is an example of this.

Stock traders often use filters to narrow down the number of companies to look at for consideration. That’s another example of a mechanical process in what can be a very discretionary overall approach.

So does having a mechanical element to your otherwise discretionary trader make you a hybrid trader? Or does it just make you more efficient?

By John

Author of The Essentials of Trading

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