Are You a System Trader or Discretionary Trader?

February 12, 2017 04:30

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Dear Traders,

Have you ever wondered whether you are a system trader or a discretionary trader? And more importantly, how do you as a trader actually find out which style suits you better?

This article promises to help traders find their own path, story and answers. A short quiz at the end will also help you decide whether you are more of a discretionary trader or system trader.

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What is a System trader?

A system trader is a trader who follows precise rules. The trading plan is robust and has covered (almost) all aspects in a set of predefined rules. The system could be executed both automated and manually.

Automated trading, also known as algorithmic trading, is of course a well known example of system trading but creating and choosing an automated trading system is not a simple task (more on a fractal based system coming soon).

The main task for the system trader is to follow the rules, period. This is true regardless of whether the execution is manually or automated. In most cases, there is no second-guessing or re-analysing.

Simply said, if the trader deviates from the trading plan, then they are breaking the system rules.

How does it compare to a Discretionary trader?

A discretionary trader is a trader that analyses first and acts second. Their goal is dissect the market structure before setting up a specific plan tailor adjusted to the specific circumstances of the moment.

For instance, when I complete my Fibonacci and wave analysis at Admiral Markets, I am using a discretionary trading system for tackling three US Dollar pairs in the Forex market.

The trading plan should specify how the analysis is performed, which indicators and tools are used, and how entries are made. But it also allows more space for making decision on a case-by-case basis.

Filters are frequently used to skip trade setups that are determined as weak. Here below is a video how to design a trading system based on discretionary methods.

System trader vs Discretionary trader. Unique advantages of each style

Both system trading and discretionary trading are well-known methods for tackling the Forex and financial markets but they have different advantages and capabilities.

Here's an overview of some the pros and cons but feel free to add your own thoughts in the comment section at the bottom.

System trader pros:

  1. Traders can focus on execution without overthinking the analytical part of trading.
  2. Traders can quickly measure whether the system itself is profitable (40 trades gives a good first impression)

System trader cons:

  1. Less opportunity to use the market structure, Elliott Wave theory and patterns for trading decisions.
  2. Traders can over focus on optimizing a Forex trading strategy, on finding the best entries, and skipping the required testing on the timing of exits.

Discretionary trader pros:

  1. Traders have more flexibility when tackling the Forex and financial markets and can adjust their trading plan to the market structure of the day or week.
  2. Traders can focus on the opportunities that offer the best value in terms of reward to risk ratio versus win percentage.

Discretionary trader cons:

  1. Traders might be less decisive when action is needed to take entries. They might keep analysing which could lead to paralysis of analysis.
  2. Traders might feel less confident during the setup and second doubt their analysis and trade plan.

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Which style is better for you? How to choose?

This is the ultimate question because both styles are perfectly fine. It is, however, vital that you choose a style that suits you and fits your trading personality.

This is partly a process of discovery and building up experience. Traders need to try out both styles by actually ( demo) trading to understand which one matches best.

Furthermore, the preference can change substantially over time. This is a natural process so do not be alarmed. For instance, as a full-time employee, you might prefer a rules based system but during your retirement you might start to prefer discretionary trading.

There are a couple of clues that could help you out with a first orientation.

Question 1: what is your experience?

A beginning trader is probably best advised to start with a rules based system. There are many decisions that need to be made during discretionary trading and often beginners miss the experience to take trading decisions with confidence due to lack of experience. Building up experience has its ups and downs but as a rule of thumb, discretionary trading often does get easier with more experience.

Question 2: how much time do you have to analyse the charts?

A trader with more time on their hand can analyse the charts in more detail and more depth, thus allowing discretionary trading to thrive. A trader with little spare time to analyse the financial markets could be better off with system trading.

Question 3: do you often change your mind? Or never?

People who often or never change their minds might struggle with discretionary trading. Of course, this is just a rough guideline. Yet there is a lot of validity to the idea that discretionary trading requires a healthy balance of both confidence and critical thinking. Discretionary traders cannot change their opinion each and every minute but they cannot blindly stick to a trade forever, either.

Question 4: do you like solving puzzles?

Discretionary trading is like being a detective and solving a mystery or puzzle. These traders need to take into account various bits of information before deciding whether they want to trade and how they want to trade (the plan). System traders are more reactionary focused and are not so keen on enjoying the labor of analysing.

Of course, there is nothing wrong with applying both styles at the same time. Just make sure to track and evaluate them.

If you are looking for system trading, then please join our free Zero to Hero course at the bottom or our live webinars. Soon I will also share more information how traders can build an automated trading system based on fractals.

If you are looking for discretionary trading, then we invite you to our analytical page and online webinars, too.

Cheers and safe trading,

Chris Svorcik

Senior Analyst

Admiral Markets

Zero to Hero Trading Course