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Discretionary or System Trading

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One of the choices that every new trader has to make, is whether to be a discretionary trader or a system trader. Discretionary trading is decision based trading (i.e. the trader decides which trades to make), and system trading is rule based trading (i.e. the trading system decides which trades to make). Both discretionary trading and system trading have the potential to be equally as profitable, so the decision should be made based upon the personality of the trader. Some traders will instantly be able to recognize which type of trading is more suitable for them, while other traders may need to experience both types of trading before they can make a decision.

Discretionary Trading

Discretionary trading is decision based trading, where the trader decides which trades to make, based upon the information available at the time. A discretionary trader may still follow a trading system with clearly defined trading rules, but will use their discretion (hence the name discretionary trading) to decide whether or not to actually make each trade. For example, a discretionary trader might review their charts and find that all of their criteria for a long trade have been met, but decline to make the trade simply because they believe that the price is too high.

System Trading

System trading is rule based trading, where the decision to make a trade is based entirely upon the trading system (hence the name system trading). System trading decisions are absolute (if the criteria are met, the trade is made no matter what), and do not offer the opportunity to decline to make a trade based upon the trader's discretion. For example, a system trader might review their charts and find that their trading system's requirements for a short trade have been met, so they will make the trade without any further decision making process (e.g. regardless of whether they like the price or not).

As system trading decisions are absolute, system trading is perfectly suitable for fully automated trading. Once a computer program has been developed to recognise when a trading system's requirements have been met, the program can make the trade (including the entry, management, and exit) without any involvement of the trader. There are various trading and charting software that provides the ability for automated trading, such as VisualStation.

Are You a Discretionary or System Trader?

Discretionary trading and system trading have the same goal (making profitable trades), and may even make many of the same trades, but they are better suited to different trading personalities.

Discretionary trading is most compatible with traders that want to be in control of every trading decision (the entry, every aspect of the management, and the exit). Discretionary traders often feel uncomfortable when they think about giving complete control of their trading to a computer program. Discretionary traders often have backgrounds in artistic endeavours, such as writing and gardening. However, discretionary trading also appeals to traders with controlling personalities, and those who like to be in control in most aspects of their life.

System trading on the other hand, is most compatible with traders who want qualities like speed, precision, and accuracy in their trading. System traders have no qualms about letting a computer program make their trading decisions, and may even value the feeling of lessened responsibility that this allows. System traders usually have logical personalities, and often have backgrounds in areas such as computer programming and mathematics.

Combining Discretionary and System Trading

It is possible to be a discretionary trader that uses system trading, but it is not possible to be a system trader that uses discretionary trading. For example, a discretionary trader may follow a trading system for their entries and take every trade that the system identifies, but then manage and exit their trades using their discretion. A system trader does not have this option, because they must follow their trading system exactly. If a system trader ever deviates from their trading system (even for a single trade), then they have become a discretionary trader rather than a system trader.

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