Wednesday, July 7, 2010

Systematic Trading vs. Discretionary Trading - Some Statistics

Traders always argue over which is better; systematic trading or discretionary trading? I believe this question will always be debated, but by looking at some statistics we can try to get a better understanding. I am a systematic trader, so I am biased, nonetheless, I began to research answers to this question and came up with some interesting statistics that I would like to share with you.

The systematic and discretionary data is from I calculated the S&P500 data and the compounded returns from 1999 to 2009.

Systematic traders 7.08%, Discretionary Traders 8.79%, and S&P 500 Cash -.93%.

The 1999 to 2009 statistics support the case that discretionary traders have outperformed system traders by statistical return measures. Interestingly, both groups have easily outperformed the market return over this particular time period.

According to Barclayhedge, if one looks at the time period from 1987 to 2009, systematic traders returned 9.33%, with a Sharpe ratio of .37, and drawdown of 22.07%. Discretionary traders returned 9.20%, with a Sharpe ratio of .61 and 10.67% drawdown. The SP500 returned 9.41% from 1987 to 2009. Interestingly, both groups underperformed relative to the market, but the numbers seem to support discretionary trading as a better alternative to systematic trading.

So which I is better? The answer is that the statistics seem to support discretionary trading. But in specific terms, the answer will depend on each individual firm or trader’s performance. Certain firms will have excellent discretionary traders, others will have excellent systematic trading systems. My suspicion is that those who do call themselves discretionary, still follow some kind of systematic approach, and leave the final decision of entering a trade as discretionary.

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