Introduction
New traders need to make a choice between being discretionary traders or systematic traders. Discretionary trading is a decision-based approach. The trader decides which trades to make based on the current market conditions. On the other hand, systematic trading is rule-based trading. A trading system determines which trades should be made; the current conditions do not matter.
Discretionary Trading: Pros and Cons
In discretionary trading, the trader decides which trades to execute based on the information available at the moment. A discretionary trader may follow (and should follow) a trading plan with clearly defined trading rules. They will use their judgment to execute the trade and how to manage it.
For example, a discretionary trader might review their charts and find that all their criteria for a long trade have been met. However, they may decide against making the trade because the volatility for the day is too low, making it unlikely for the price to reach the specified profit target for the trade.
The advantage of discretionary trading is that it adapts to the current market conditions. You may have a great trading system, but if you know it tends to perform poorly under certain market conditions, you can avoid those trades. Or if you notice that your strategy is performing very well under other conditions, you can increase your position size slightly during those times to maximize profits.
The downside of discretionary trading is that many traders are prone to self-doubt. They may struggle with deciding when to trade and when not to trade; therefore, it may be better to resort to a more systematic approach. Discretionary systems rely on the trader’s psychology; excessive greed or fear can quickly undermine the profitability of the discretionary trading system.
Systematic Trading: Pros and Cons
In systematic trading, the decision to make a trade is entirely based on the trading system. Systematic trading decisions are definitive. There is no room for the trader to decline to make a trade based on their judgment. If the criteria are met, the trade is executed.
A systematic trader may review their charts and find that their trading system’s requirements for a short trade have been met. They will execute the trade without any additional decision-making process. This holds true even if their “feelings” tell them it is not a good trade.
Systematic trading strategies can often be automated; this is because the rules are clearly defined, allowing a program to execute them on behalf of the trader. Once a program is designed to recognize when the trading system’s requirements are met, the program can execute the trade without any intervention from the trader. This includes entry, management, and exit.
The advantage of a systematic trading strategy is that it is not affected by the trader’s psychological fluctuations. The system executes all trades; it does not matter how the trader feels.
The downside is that systematic trading is not highly adaptable. Trades are executed as long as the conditions are met, even in less favorable situations. To help address this issue, more rules can be added to the system, but this often leads to missing out on some winning trades as well.
Discretionary Trading
– Adapts to market conditions
– Trades are not automatic
– Easy to doubt decisions
– More control
Systematic Trading
– Based on defined rules
– Trades can be automated
– No doubt in decisions
– Not highly adaptable
Finding Your Own Style
Both discretionary and systematic trading aim to achieve profits, even if accomplished in slightly different ways. The two systems may execute many of the same trades. Each system is likely suitable for different types of traders.
Trading
Traditional trading is best for traders who want to control every trading decision: entry, stoploss, and exit. Traditional traders often feel uncomfortable thinking about giving complete control of their trades to a program. Traditional trading also appeals to traders who like to be in control in most aspects of their lives. It is also suitable for those who just want to adjust their trades to current market conditions.
On the other hand, systematic trading is best for traders who want speed, precision, and verification in their trades. System traders have no issue allowing a program to make trading decisions on their behalf. They may appreciate the reduced sense of responsibility that this provides. System traders may have logical personalities; they often have backgrounds in fields such as programming and mathematics.
Can you use both styles?
It is possible to be a traditional trader who uses systematic trading. However, it is not possible to be a systematic trader who uses traditional trading. For example, a traditional trader may follow a trading system for their entry points and execute every trade that the system dictates. They may then manage and exit their trades using their own judgment.
This option is not available to a system trader because they must follow their trading system exactly. If a system trader deviates from their trading system (even for just one trade), they have become a traditional trader.
Source: https://www.thebalancemoney.com/discretionary-or-system-trader-1031038
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