Many traders, especially the new ones, often find it difficult to decide whether to do discretionary trading or system trading. Discretionary trading is when they make trading decisions based on the current market condition. On the other hand, system trading means traders let the system makes a decision on its own, regardless of the current situation.
Both of these systems can be equally profitable. Thus, traders should decide according to their personalities. Some traders can directly know their trading personality. Meanwhile, some others need to try both types before they make the decision.
The Pros and Cons of Discretionary Trading
In discretionary trading, traders decide which trades to make by themselves. They usually consider all of the available information.
To be a discretionary trader, you need to have a trading plan with complete defined trading rules and always stick to it. Yet, you can use your discretion in taking the trades and managing it.
For instance, a discretionary trader may review their charts to know if his criteria for a long trade have been met. Yet, once the criteria have been met, the traders still can decline the trades because of the low volatility at that time.
The main advantage of discretionary trading is its adaptive nature. You can have a super great trading system, yet you still can decline the trades if you feel like it may perform poorly.
Other than that, you can also increase your position size once you know that your trades may have better performance in other conditions.
Conversely, the biggest disadvantage of discretionary trading is it allows traders to rely on second-guessing themselves. There are traders who are poor at deciding. Thus, if you feel like you are poor at making a trading decision, you better choose system trading.
It is highly affected by traders’ psychology. If a trader is too greedy or too fearful, he may not get a huge profit.
The Pros and Cons of System Trading
People usually call system trading by rule-based trading. All of their trading decision is made by the system. All of those decisions are absolute, traders can’t decline the trades in all conditions.
It is often automated by the computer according to all rules traders have set before.
The advantage of this trading system is that traders’ psychology will not affect their trading decision. Trades’ feeling will never affect their trades.
However, this trading system is not adaptive. In other words, the system can keep making the trades even in unfavorable conditions. Traders can mitigate this, by creating more rules to the system. Yet, this solution can also cut out some winning trades, at the same time.
