Discretionary vs systematic trading: which one is better?

Do you want to know more about discretionary vs systematic trading? Watch our latest video to find out which one is better.

Discretionary vs systematic trading – A simple but effective guide

Systematic trading involves a trading system that says wind certain conditions are met, you place a trade in one direction or the other. It leaves very little to the imagination, and simply gives you a “buy, hold, or sell signal.” Most traders use some type of system, as it gives them a framework from which to trade the markets. By contrast, discretionary trading involves simply making a decision on a spur of the moment type of calculation.

An example of systematic trading might be using something like a moving average crossover system. In this chart, I use a classic 10/20 moving average crossover system. You can see on the chart that it worked really well on one particular trade, but on the other hand you get quite a bit of chopped that would’ve cost you a few pips here and there. Ultimately, we are in a move now that looks proper one the opposite direction. That’s an example of how a system works, you get the signal and you simply do what it tells you.

Discretionary trading could keep you out of this trade because it involves your best educated guess in a sense. For example, there might have been an economic announcement coming out that might have kept you out of all of the choppiness. On the other hand, when you look at the weekly chart of the AUD/JPY pair in this chart, you can see that we have been in a downtrend for some time. Discretionary trader may just simply sell this market occasionally, expecting to eventually make money based upon the overall trend.

The reality is that most traders use discretion even if they are systematic trader, simply because it involves a lot of common sense. For example, Nonfarm Payroll numbers could be coming out shortly, and if you get a signal to start buying or selling, you may stay out of the market simply because you know how volatile that can be. With fact, you are using discretion along with a system. Truthfully, it’s very rare to be a systematic trader with no discretion, which in a sense tends to lend itself to people who use expert advisors, or what are known as trading robots.

Most traders will try to be a systematic as possible, but you have to use some discretion so that you don’t make really dumb choices. As an example, entering a CFD market for the S&P 500 right before the Nonfarm Payroll announcement is simply gambling, and as a result you would more than likely step away. Discretionary trading can involve simply selling in a downtrend in stepping away. They may not even have put on a stop loss at that point in time, which could be very dangerous. Having said that, some traders will buy options to offer put any significant moves while they sleep. Truthfully though, most people, and most successful traders I know, will use a little bit of discretion with their systems.