Lesson 11 – Discretionary vs System Trading

When you’re getting started with trading, you have to make a decision on what type of trader you want to be. You can be either a system trader or a discretionary trader. When you’re a discretionary trader, you’re doing trading which is decision based, so you’re the one deciding the trades which will be made. As for system trading, this is when you use rules and a trading system is the one that tells you what trades should be made. In both cases you can make a lot of money, so the thing that should help you decide is your own type of personality. Some of the traders can see immediately the trading type which is best for them, but others might want to test them both out before choosing one to focus on.

Discretionary Trading

This type of Forex trading is done entirely by the trader and he is the one that decides what to trade and when to trade it. He uses the information which is available to make those decisions. The discretionary trader will use a trading system if he wants, but he will be the one that will eventually decide if a trade should be made or not. An example is when a trader that does discretionary trading sees in the charts that all the long trade criteria is met but since the price is a bit high he will still decline to make that trade.

System Trading

The system trading uses rules entered into a trading system and that system is the one taking all the decisions. With system trading the decision of the trade is done based on rules alone and the trader doesn’t make any decisions. When the charts say that all the requirements have been met for some type of Forex trade, then that trade will be done and the trader will not be part of the process of decision, even if  he feels that the price is good or not.

Since this type of decision is absolute, the trading system is often used in trading that is completely automated. After the computer software recognizes that all the requirements have been met and a trade can be done, it will make it (the entry, the management and the exit as well), so the trader doesn’t need to get involved at all. There are all kinds of programs available on the market which do automated trading.

What type of trader are you?

In the end, both types of trading systems have a similar goal, that of making a profit for the person using them. In many cases, both systems will result in the same decision and the same type of trade, but they are still different and the personality of the trader will decide which one will be used.

Traders that go with discretionary trading are the ones that want to control the trade every step of the way, from the entry to the management part or the exit. A discretionary trader will usually not feel very comfortable to let go of the control on the decision to trade. Letting a computer decide what to do with their money is something they don’t want to do. Most traders that decide to do discretionary trading are the ones that have personalities that are controlling.

As for the traders that decide to go with system trading, they are the ones that want their trading to be accurate, precise and quick. They have no issues when a program decides how they should do their trades and they sometimes even appreciate that they don’t have to make a lot of decisions. The personality of a system trader is usual logical in nature and they come from backgrounds like math or programming.

Combining System & Discretionary Trading

While discretionary traders can use the system trading, a system trader will not use discretionary trading. A trader might use the trading system for the entries but then he can decide on his own how he will manager the trade or the exit. System traders don’t really have the option to decide what decisions to make and what to leave to the program. Once he chooses to make decisions, he no longer is a system trader, he is a discretionary trader.