Adrian Reid contrasts discretionary trading with systematic trading, explaining that moving to a rules-based system reduced emotional volatility. He notes that emotions still arise when signals appear, but systematic trading allows those instincts to be converted into testable rules that can be validated and potentially improve the system.
When I was non systematic, my emotions were all over the place because my results were erratic. My fears and hopes and dreams and greed and all of that got in the way. So it's very unstable emotionally. When I was trading with the discretionary approach, when I went systematic, that calmed it all the way down, which was great because all of a sudden I'm just following the rules, you know, buy, sell, buy, sell, based on the system. So in that sense my mind calmed a lot. But a couple of weird things happened. The first one was when I was running the system. Every now and then I would get a signal and I'd go, I don't want to take that. But this, just because you're systematic doesn't mean those emotions don't come up. Still human, you're not a robot. But the great thing about systematic trading is you can take those emotions and channel them into testing. So if I saw a stock and went, oh, I don't want to trade that stock, I can then go, oh, hang on a minute. Why? Oh, look, it's really gappy or it's really volatile or the last time I bought it I had a loss or whatever the reason was. Then you can take those and you can those observations and you can codify them and then test them to see if they're actually value adding or value destroying. Sometimes you find a rule that really does help, improves the system. So you can add it to the system and it gets more profitable from then on.
