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The Pros and Cons of Discretionary Trading vs. Systemic Trading

For any trader, there’s the dilemma of whether to go with Discretionary Trading vs. Systemic Trading – discretionary trading can be highly successful but demanding and at times, seemingly ambiguous, while systematic trading can be straight forward but lead to missing out on taking obvious trades. There’s certainly an argument for each – so let’s consider the pros and cons on either side.

Discretionary Trading

Discretionary trading means that trades can be taken outside of a ridged set of rules. Trades can be entered or exited based on the understanding of the current trading conditions and underlying shifts in market participation.

One of the biggest pros of trading in this manner is that you can make decisions based on experience and judgment calls rather than being restricted to acting in a way that might not fit the current situation. Trades can also be initiated more subjectively on news items for example.

What it really comes down to is the ability to change your trading behavior based on incoming information that has not been able to be factored into your thinking.

However, the trouble with discretionary trading is that it’s easier to lose yourself in what you think is rational decision making but realistically is emotion-based trading. You might move your stop a little bit further away, then do it a little more until the loss becomes unreasonably large. You might incorrectly weigh the importance of the various different factors in taking a trade. The trades you do take might not be comparable, so you can only really assess your own personal trading performance rather than a specific strategy’s.

Systemic Trading

Systematic trading or mechanical trading can be described as taking and managing trades based on a specific set of pre-defined criteria.

One of the most useful aspects to a systematic trading methodology is that the rules, if set up correctly, should be clear and unambiguous in most cases. Knowing exactly what your trades look like and where your entries/targets/stops are can remove a great amount of the stress involved in execution. Decisions are pre-defined and so emotions simply have no place in determining the fate of a trade.

When you are taking trades that are rule-based, you’re also able to compare performance much more effectively. By tracking the performance of a strategy, it’s far easier to incrementally improve it. The more mechanical a strategy is, the easier it is to automate too – and this can lead to better execution and the ability to simultaneously trade a far greater number of markets.

As good as systematic trading sounds, inevitably there are drawbacks. For example, taking trades that you really have a strong idea won’t work then seeing them stop out can be difficult for some traders to accept. Missing out on trades that have a great chance of working but you have no trade because technically the setup wasn’t generated is another major issue. And it’s also much harder to incorporate entries/targets/stops that are based on market structure rather than consistent levels of risk:reward.

The Pros and Cons of Discretionary Trading vs. Systemic Trading

Many traders whilst learning the ropes would do well to move towards a systematic trading strategy. It makes trading far more objective and unambiguous and it’s easier to stomach losses on questionable setups when put in terms of knowing you will lose on a certain percentage of trades anyway.

But for someone who has a good understanding of the market, strong levels of focus and a firm handle on their emotions, discretionary trading has some real advantages. But the truth is that to a certain extent, many discretionary traders will use some systematic rules and so their method is a hybrid of approaches anyway. Perhaps in terms of risk, trading at a certain time of day or purely just the way they approach their daily preparation – most traders have some hard and fast rules or systematic approach to certain areas of trading.

Understanding the pros and cons of discretionary trading vs. systemic trading will help you to identify what’s best for you.


Trade well.