If you engage in the world of trading as a new trader, then the reality is that it is necessary for you to make a decision about whether you will become a discretionary trader or if you will become a system trader. When you hear the term discretionary trading being used in the realm of the trading world, this refers to trading that is based on making decisions. In this case, the trader makes an informed decision in regard to what trades he or she will perform by considering the present conditions of the market. On the other hand, the term system trading is used to refer to trading that is founded on the application of rules. In this case, the trader will make a decision concerning what trades he or she will perform without giving any consideration to the present conditions of the market.
It is realized that discretionary trading, as well as system trading, may both be highly profitable. As a result, the type of trading that one engages in should be more linked to the type of personality that the trader possesses. There are some traders who may be able to immediately realize what kind of trading will suit them best. But there are other traders for whom it may be needful to engage in each kind of trading prior to being able to make a choice about what kind of trader to become.
Pros and Cons of Discretionary Trading
Discretionary trading is trading that is based on the performing of decisions. With this kind of trading, the trader must make a choice concerning what trades to perform in correlation to the information that is accessible at the present time. Yet, it is realized that a discretionary trader may yet seek to follow a clear trading plan with well-defined rules for trading and this is highly recommended. However, the trader will still apply the usage of his or her own discretion in regard to the performance of the trade and the issues pertaining to the management of the particular trade.
Take into consideration, for example, a discretionary trader may conduct some reviewing of the charts and discover that the full requirements of his or her criteria pertaining to a long trade are in place. Yet, the trader may make the decision to not move forward with performing the trade as a result of the day having volatility that is considered to be at a stage that is too low, which means that the price likely will not achieve the desired profit target in regard to the particular trade.
Being adaptive in relation to the present conditions of the market is an advantageous consideration of discretionary trading. The trading system may be a good one. Yet, if you realize that your trading system may result in poor performance under certain conditions pertaining to the market, then you are able to avert engaging in those kinds of trades. Or if you realize that you have a designated strategy that results in a great performance under other situations, then you can opt to augment the size of your position a bit during such cases for the sake of maximizing your profits.
It is reckoned that a setback pertaining to the discretionary system is that often traders may tend to wonder about the trades they have made. In other words, they second-guess their decisions. These traders may not have strong competency in comprehending when it is a good time to trade or when it is a poor time to trade, which means that it would be best for them to apply the usage of trading that is more systematic. Discretionary trading is strongly tied to the trader’s mindset. When one is extremely fearful or greedy, this can result in the destruction of the profitability pertaining to discretionary trading rather quickly.
Pros and Cons of System Trading
System trading is noted as applying the usage of rules. This means that engaging in trade is linked to rules that guide this system. As a result, it is realized that decisions that are made with system trading conform to all rules and do not provide the option to refuse to make a trade with the application of the discernment of the trader. If the criteria are in line, then the trade is performed.
Those who use system trading may conduct some reviewing of the charts and discover that the requirements pertaining to the trading system in consideration of a short trade are in place. As a result, the will perform the trade without any more decisions being applied, despite the fact that they may sense that the trade is not a good one.
There can be the frequent automation of strategies that apply to system trading due to the fact that there is such a clear definition of the rules, which makes it possible for a computer to engage in the implementation of the indicated rules without the immediate involvement of the trader. When the development of a computer program that detects the requirements of the trading system is in place, then the program is able to perform the trade. This means that the computer program is able to conduct the entry of the trade. Further, the computer is able to handle the management of the trade as well as the exit of the trade. With this being the case, there is no need for any direct actions from the trader.
Because of the fact that system trading is not linked to the whimsy of the trader, this makes it highly advantageous. This system engages in the performing of every trade without any consideration of the feelings of the trader.
On the downside, because system trading does not allow for much adaptation, this is seen as a disadvantage. As long as the conditions are in place, each trade is conducted even when there are conditions that are clearly not favorable. In order to help to address this issue, it is possible to provide the addition of more rules to the system. But the downside to the addition of more rules is that this can mean missing out on some trades that could otherwise win well.