What’s the Difference Between a Discretionary Strategy & a Mechanical System?

This is a discussion on What’s the Difference Between a Discretionary Strategy & a Mechanical System? within the New to Trade2Win forums, part of the Reception category; Hi, Traders need open minds. Many of us believe trading systems are the only way to enjoy long-term success in ...

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Old Aug 27, 2009, 2:32pm   #9
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Joined Aug 2009
Traders need open minds. Many of us believe trading systems are the only way to enjoy long-term success in the markets. Discretionary traders like to take a more active hand in trading. System traders can be both fundamental and technical, and though discretionary traders aren’t mechanical, they often make trading decisions based on the same technical analysis as system guys.
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Old Aug 29, 2009, 1:30pm   #10
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well discretionary is probably based more on gut feeling rather than a signal created by whatever system a system trader uses
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Old Sep 22, 2009, 12:54pm   #11
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System Trading vs Discretionary Trading

System Trading
Systems traders have a set of rules that they follow and if all the rules are met to take trade the trade is entered. Within that system they will have rules for exiting a trade as well and this is usually done automatically. With System trading it removes the human element.

Most System based trading usually involves some level or programming or knowing a programmer that can could create your system. With System trading you would a create a mechanical set of rules. The next stage would to see how any said system would perform over a given period using a back testing strategy you use at least 200 trading samples. After you have analysed the successes of your strategy you can then automate your system.

The benefits are it removes all the emotion from the trading which is what some people like. It does all the hard work!

Discretionary Trading
Discretionary trading is what I do let use the following as an example:

You may have a setup rule for entering and exiting a trade but you apply them based upon your decisions, for example let say with a system trade place a range breakout from 8:00am till 8:30am with a system trade you would take the trade as it’s yours system trade.

Now with a discretionary trade, that same range break out I might look at another chart or time frame before I pull the trigger. Even if the trade is entered I would use the information at hand such as sectors charts indices charts help me to manage my stops, my profit targets Trailing stops etc.

Your results will vary greatly depending on what discretionary values you apply. With a clear mind so to speak you could look at the price in conjunction with a particular time frame and decide that this range breaks out is not valid as it is hitting major resistance. But our system trade would execute this trade regardless.

Some traders use discretionary trading but when entering a trade there is have a set of rules that are followed, so it’s a kind of Hybrid of systems trading. The biggest problem traders have is following the rules, or they are unaware when their decision process is impaired. These can be for many reasons, a recent heavy loss, having a bad day, your football team losing in the Champions league semi-final. It does not matter what the reason is if your head is not right then your discretionary system will be affected where as your automated system trading will not suffer from such mere human elements

No one system is better than the other, the main goal is to be aware and vigilant that for every system you do use; you are aware of when it stops working and the markets are responding in a different or entirely new way from before.


Last edited by timsk; Dec 6, 2010 at 3:44pm. Reason: Housekeeping
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Old Nov 9, 2010, 7:08am   #12
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Re: What’s the Difference Between a Discretionary Strategy & a Mechanical System?

Mechanical system basically means there are rules/signals you just follow. Discretionary means you have to weigh the current market environment, and make trade decisions based on that. Because of that, mechanical systems are more objective while discretionary ones are more subjective.
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Old Nov 14, 2013, 4:50pm   #13
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Competing with the big shots

I estimate that, as of Sept 2013, Algorithmic trading (see Wiki article) comprises around 75 - 80% of all trades. These computer programs are written by guys with Maths or Physics doctorates.

So how are you going to compete?

Option 1. Insider knowledge/other illegal means

Option 2. Practice discretionary/intuitive trading until you develop sufficient expertise to be able to compete (est 10,000 – 15,000 hours work – see Matthew Syed’s book, Bounce). I actually think it would be quicker to become a golf pro or tennis pro.

Option 3. Develop your own trading ideas and test them (I use Excel). Creativity and original thought are already there as part of the brain's toolbox. Using these tools you can compete without getting a science PhD or spending 15,000 hours watching charts.
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