Whereas mechanical trading uses a fixed set of rules to determine trade timing and direction in a systematic if this, then that fashion, discretionary trading is not confined in the same manner. The difference is in the fact that the discretionary trader does not always make the same interpretation of a market indicator (chart, technical study, fundamental information, etc.), or use it in the same fashion each time it is applied. He/she uses his/her own judgement to determine the value of that indicator at the given point in time.
From the perspective of Technical Analysis, the classic example of a discretionary trader is one who uses chart patterns to make trading decisions in a visual, nonalgorithmic fashion. This type of trader seeks patterns in the charts and tries to determine what they mean given the market situation.
On the side of Fundamental Analysis, it could almost be said that one is talking exclusively about discretionary trading. There are some quantitative elements which can be applied, but forecasting a company's earnings per share, for example, requires using some "assumption" and interpretation.
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