A question and answer format on Process vs Systematic Trading and how to use AlphaReveal platform to do both better.
Question: What is process based trading and what is systematic trading?
Answer: Process based trading is trading oriented around a certain process which involves reading the market a certain way. As professionals, when we talk about a discretionary approach we're really talking about a "process oriented" approach vs a "setup oriented approach". Systematic trading is based more on setups. It is based on specific triggers that determine when to enter a trade. A trader can use AlphaReveal to "weight" and choose the best time to enter but he won't enter unless the specific criteria are met. A good systematic strategy should have a historical edge.
Question: Can you describe the systematic process better?
Answer: Sure, let's take a hypothetical pattern that I'm just making up and let's say that a trader finds that when the S&P 500 is at a 2 DAY high that there is a tendency for the market to reverse. This type of pattern may offer an edge but it may not be "juicy" enough to trade in itself. The systematic trader comes in knowing what he anticipates to do. He or she has a plan. He uses our software and his experience in the market to actually see if that pattern is actually developing and to find the best entry possible.
Question: So, that sounds pretty good. What wrong with the systematic style?
Answer: There is absolutely nothing wrong it. In fact, some of my best strategies are systematic. But, let's say the trader comes in and based on his read feels the market is very likely to make a strong drive to a new high. That's the easiest trade to take but it's not programmed. Sure, he might know that there's a tendency for the market to reverse if it reaches a 2-day high but why not come in and take the easiest trade possible. That's the downside if one limits themselves to systematic trading only.
Question: Right, and what you described is a discretionary process?
Answer: We're not talking about making "seat of the pants" decisions. But, we're talking about a professional trader who knows their market well, watches it almost every day, and has a great feel for it. These traders focus on the "process" versus "setups" and they can become extremely strong because they can find so many more opportunities. They also know when to "turn it on" and "turn it off".
Question: What's going to be easier for new traders?
Answer: New traders will find systematic trading easier because they can be more confident and confidence is often what new traders need to take the trade (and what old traders need less of). Also, if one is too leveraged then either trading style can be difficult. A process based trader is happy to be in the market every single day even if he's just breaking even or making a little because he knows he can turn it on when he gets a good read. This ability to "tread water" is a strong asset, as well as the ability to maximize the profits when one trades at their best.
Question: But, as you said sometimes the easiest trades aren't the system trades.
Answer: Exactly, this is why I coined the term "point-2-point" and now "process based trading". If you know the market is going to produce a strong trend then why wait for it to make a high to try to short it? Just take the trend play. It's important to keep in mind that as traders we can trade for trends, chop, reversals. There are no rules. Often times, we can get into "rut" where we want to take a single trade that maybe made us money in the past without doing the proper work. I feel process based traders have a greater chance of long term success. Most successful system traders I've known trade at least 2, 3, or more systems. A process based trader may also be more able to adapt systems to current market conditions.
Question: Can you tell us more about what the process trader is doing?
Answer: Obviously, some of what I'm watching is proprietary. But, I am watching a lot of the things within the AlphaReveal program. I'm watching the order flow, Q-Tracker, and other data. I'm getting data and looking for a conviction in which way the market will go. Once I determine the general characteristics of the market then I'm looking for specifics to help me place the trade. Sometimes, I may form an opinion and then read the order flow and realize my initial idea was wrong or "isn't ready yet". There's a feedback loop process. The discretionary part is in the decision making but the process doesn't change. A process based trader typically follows the same routine every day or similar routine.
Question: That's good to keep mind. So, if you're a process based trader and then one evening just get bored and decide to put a trade on?
Answer: Right, that's a bad trade. That's not a professional trade because you didn't do the work and go through the proper process.
Question: Does one need to be purely a process or systematic trader?
Answer: Absolutely not, a trader can run both types of methodologies. Both styles can work well when integrated together especially since most systematic strategies often won't trade that frequently. Systematic strategies often don't require the constant self introspection that process based trading demands which can also be a relief. On the other side, its easier to take the losses in a system if one is doing well in their process based trading. I think they compliment each other.
Question: And, how can the systematic trader use AlphaReveal to gain an advantage? What about the process based trader?
Answer: Basically the systematic trader is going to come into the market and wait for their setup to trigger and then they can watch the order flow and various market internals that our program surfaces and use that "under the hood" information to make the best decision possible. The process based trader has a routine that he or she follows. A process based trader is best described as "pinging" various data sources trying to get a read. Sometimes the read from the order flow is so strong that that's all he needs. Sometimes there isn't much going on there and he can shift his attention to some other data. On some days, the conviction just may not be there to put any trade on. New traders feel there is something wrong when that happens. But, often there isn't anything wrong. The opportunity just may not be there that day.
Question: What would be your lesson for the process based trader?
Answer: A process based trader needs to get into a routine and develop some experience with his tools over time. A process based trader is going to watch the same market at the same time nearly every single day for about the same length of time. Take the same breaks. The process is what's important. It's not about the setup. Sometimes a trader will learn to identify specific setups and that's great. But, so many traders want to have "setups" without first understanding the importance of context. AlphaReveal was designed especially for process based trading and has many innovative features to enable the trader to reach highest flow states possible.