We all face choices, every day of our life. However, often the questions we might ask ourselves aren't really choices, because we are not always forced to choose. For example, in a restaurant, when we browse a menu, there is not really a choice between a main course or a dessert. The courses are specifically designed to be complementary, as opposed to replacements for one another.
Just because you might elect to have a burger as a main course does not prevent you from having a macaron for dessert, something sweet to end the meal. When it comes to main courses, it's not really customary to order several large dishes for yourself (unless you happen to be extremely hungry: I admit there have been occasions, when I might have had more than one burger!). So in effect, what might be framed as a choice, is not always a choice at all.
If we think of the way people talk about different trading styles, it's precisely the same! Often, they frame the question as a choice, when in fact, different styles are complementary. Take the choice between systematic and discretionary trading. On a personal level, you might be forced to choose between the two, simply because of a lack of time to do both and also because some people are better at discretionary, whilst others do a better job at systematic trading. On a higher level, if you are allocating to these strategies, there isn't necessarily a choice between either discretionary or systematic trading. If the strategies are in principal uncorrelated, you can choose to invest in both, being careful to manage the risk between them.
Back to burgers and macarons, now... there is also the question of knowing what you are eating. With a burger, it's fairly straightforward. Even to the least culinary of observers, it's clear that the burger is made up a bread bun, garnished with lettuce and tomato, separately by a patty, made of minced meat. Contrast that to a macaroon. Ok, it's clear it has sugar in it, but aside from that, if you have never made them and don't have a recipe book to hand, it is simply not clear how they are made or even the ingredients. In fact the most important ingredient of a macaron is ground almonds and the process includes making Italian meringue (which I never guessed until I tried to make some).
If we head back to our discussion about systematic and discretionary trading, we see another parallel. Systematic traders are often said to be running black box strategies. If anything, the strategies that systematic traders can run, can be far more transparent than those which discretionary traders do. Take for example CTA strategies, which are typically trend following. They literally buy assets which are trending higher in price and sell those trending lower in price - that is the whole idea, in a single sentence! In practice, when implementing it, there are many little details which complicate the matter, but the principal is pretty transparent - and hardly a black box. Let's instead ask, whether we can easily define what a successful discretionary trader does in a single sentence. It is extremely difficult to do so! If anything, I'd argue that discretionary trading is more "black box trading" than a lot of what goes under the name of systematic trading, because it is so difficult to define the process by which a discretionary trader makes a decision. With a well designed systematic model, you should be able to understand why it is putting on certain trades and the principal which the system follows.
So maybe, when you see a burger, in actual fact it's more like a macaron.... and vice versa, at least when it comes to classifying trading strategies? Maybe you can have both your burger, macaron and even cake and eat it, when it comes to allocating risk!
Like my writing? Have a look at my book Trading Thalesians - What the ancient world can teach us about trading today is on Palgrave Macmillan. You can order the book on Amazon. Drop me a message if you're interested in me writing something for you or creating a systematic trading strategy for you! Please also come to our regular finance talks in London, New York, Budapest, Prague, Frankfurt, Zurich & San Francisco - join our Meetup.com group for more details here (Thalesians calendar below)
21 Oct - London - Robert Carver (FULLY BOOKED!) - Lessons from systematic trading
25 Nov - London - Panel - Macro Markets Discussion
26 Nov - Zurich - Thomas Schmelzer - Portfolio Optimization, Regression and Conic Programming