Community Forex Questions
System-based vs. discretionary trading
There's something appealing about creating an automated trading system that requires you to act in a certain way every time market movement triggers a signal. The advantage is that it is far easier for some traders to maintain trading discipline when there is no discretion in the decision-making process. The disadvantage is that in order to reap the full benefits of a profitable system, the trader must follow the system's instructions exactly.
Creating trading systems, on the other hand, is a major undertaking. While some traders can use off-the-shelf software programs to back-test historical data, many encounter difficulties. Furthermore, everyone appears to be looking for the Holy Grail of trading systems—one that is so powerful that it is 100% foolproof while remaining so secret that it has yet to be discovered.
Being a discretionary trader is also no easy task. Discretionary traders, like their programmer counterparts, must follow rules. The difference is that discretionary traders apply those rules based on their subjective assessment of each situation. There may be significant differences in how the trader's strategy is implemented from one trade to the next. This is not to say that a discretionary trader can get away with discipline lapses. Rather, because the trader's decision-making process is subjective, discipline must always be at the forefront.
Creating trading systems, on the other hand, is a major undertaking. While some traders can use off-the-shelf software programs to back-test historical data, many encounter difficulties. Furthermore, everyone appears to be looking for the Holy Grail of trading systems—one that is so powerful that it is 100% foolproof while remaining so secret that it has yet to be discovered.
Being a discretionary trader is also no easy task. Discretionary traders, like their programmer counterparts, must follow rules. The difference is that discretionary traders apply those rules based on their subjective assessment of each situation. There may be significant differences in how the trader's strategy is implemented from one trade to the next. This is not to say that a discretionary trader can get away with discipline lapses. Rather, because the trader's decision-making process is subjective, discipline must always be at the forefront.
System-based trading and discretionary trading are two distinct approaches to trading in financial markets.
System-based trading relies on predefined rules and algorithms to make trading decisions. Traders using this approach develop a system that automatically executes trades based on specific criteria, such as technical indicators, price patterns, or statistical models. The advantage of this method is consistency and removal of emotional biases, as the system follows a set plan without deviation.
Discretionary trading, on the other hand, involves the trader making decisions based on intuition, experience, and current market conditions. While this approach allows for flexibility and adaptability, it also introduces the risk of emotional decision-making, which can lead to inconsistent results.
System-based trading offers discipline and backtestable strategies, while discretionary trading allows for human judgment and adaptability in unpredictable market environments.
System-based trading relies on predefined rules and algorithms to make trading decisions. Traders using this approach develop a system that automatically executes trades based on specific criteria, such as technical indicators, price patterns, or statistical models. The advantage of this method is consistency and removal of emotional biases, as the system follows a set plan without deviation.
Discretionary trading, on the other hand, involves the trader making decisions based on intuition, experience, and current market conditions. While this approach allows for flexibility and adaptability, it also introduces the risk of emotional decision-making, which can lead to inconsistent results.
System-based trading offers discipline and backtestable strategies, while discretionary trading allows for human judgment and adaptability in unpredictable market environments.
Dec 08, 2022 15:17