Measuring Profitability of a Discretionary Style

Another sort of noob question…

With a systematic, mechanical trading style, notwithstanding its limitations, if designed correctly you can expect a profit level within a certain range, if executed unfailingly over an appropriate timeframe.

With discretionary trading, even though the trader will operate on his/her same preferred timeframes, markets and instruments, any level of profitably cannot be meaningfully predicted, unless perhaps the trader has been going for many years.

To put it more concretely, profitability (CAGR) of a systematic trader will be on average same in year 1 as in year 2.

Profitability (CAGR) for a discretionary trader, assuming they survive to year 2, should on average be considerably better in the second full year than the first.

I think with discretionary trading so many things can take a toll. Putting aside dichotomy of some apparently feeling virtually orgasmic about the trading process and others feeling icy detachment, almost boredom, promotes optimal outcomes, any poor health or relationship issues will potentially cloud the mind and put the discretionary trader off their game.

Bit of a ramble, sorry. Hypothetical example probably illustrates – let’s say Des the discretionary trader has traded like a beast over the last 10 years on ASX holding usually for a few weeks. Great risk management, everything. He manages to extract an average of 25% every year from the markets. In the 11th year Des’s partner, Tess, calls him a loser who is more interested in scoping charts than scoping her. She leaves him for his bet mate, Jim, who prefers to spend his time at the…gym. Des trades on, same type of trades etc. He thinks he’s all good. But at the end of year 11 he has lost 30%. Relationship issues did affect him and his previously laser focus. Had Des followed a completely non-discretionary system he would’ve continued executing trades, even if feeling a bit despondent, with the same expected CAGR. (Though not many mechanical systems at all would have averaged 25% per year over 10 years.)

Can one expect a particular level of profit with a particular discretionary style? I sense with discretionary trading the goals are much more general, such as „preserve capital“, „beat the market“, or more ambitiously „beat the systematic traders‘ returns“. But you can’t talk of precise expected CAGR 15.47% or 26.42% as simply way too many imponderables are involved with exercising discretion as every single trade depends on the clear, focused thinking of the trader.

 

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