Discretionary vs System based trading

[sculptor66]

You have your definitions of Discretionary and System mixed up.

There are two types of Discretionary traders and both do not use any automation:

1) Gut feel or instinct as you stated

2) Rule base...type of rules that can't be automated

IMHO trading by 'rules that can't be automated' is the same as trading on gut feel.

Either a rule can be quantified and thus automated, then it will be something like 'buy if the market moves up more than x ticks within y minutes' - a very simple momentum entry - or they can not, then the rule will be something like: 'buy if the market shows strong upside momentum'.

But what is 'strong'? Well, if not defined by some objective criteria, this completely depends on subjective assessment, which in the end is hardly more than gut feel.

That being said, it's possible to mix up systematic, rule based and discretionary trading in some way. For example, one could use some quantifiable criteria to select which stock(s) on a given day to trade, the direction and that the trade will be closed at the end of day, but the decision when to enter the trade exactly is discretionary.

Whats important here ist that the systematic part and the discretionary part can be isolated and evaluated individually. In our example, the performance of the systematic part would evaluated by assuming an immediate entry without discretion. The performance of the discretionary part then is the difference between this hypothetical performance and the actual performance.

IMHO a trader unable to evaluate his trading strategies is destined to fail.

 

[wrbtrader]

Most discretionary traders will incorporate rules within their method that are not price related.

For example, my trading day starts at 0930am est. Yet, if I'm stuck in traffic and I arrive late for trading...I do not trade the first 15 minutes after arrival so that I can use that time to relax and get into the right mindset for trading.

I do the above because stats of my daily routine for the past 12 years show that I have a 72% chance of a loss in my first 2 trades of the trading day if I arrive late and begin trading within 15 minutes after arriving. Whereas if I wait 15 minutes after being late, I have a 36% chance of a loss in my first 2 trades.

Note: Stuck in traffic on a trading day creates a lot of anxiety for me as a discretionary trader.

The above is a rule for my trading as a discretionary trader...I decide when to trade and when not to trade based on rules...rules that were derived from statistics of my daily routine habits. You can not automate statistics of someone's daily routine but you can automate price action rules.

I have another rule...I don't trade while eating lunch. If I do, my performance is not good.

That's my point, discretionary trading is not only about rule base price action. In contrast, a discretionary trader adapts every day (good or bad) via things that have an impact on his/her trading results that has nothing to do with trade signals along with doing such in combo with rules based on price action.

They have made a decision that discretionary trading for them is better than automation trading.

This is the reason why its very common for a programmer to only be able to program/code only partially a discretionary trade method...only just the rules based on price action whereas the rules based on daily routine leaves the programmer scratching his/her head because the discretionary trader uses them in their trading because the trader knows the stats of their daily routine.

Two types of discretionary traders:

1) Gut/Feel...usually ignores any kind of stats. Therefore, has no way of being able to evaluate his/her trading beyond just looking at the win/loss column of their broker platform.

2) Rule Base...using stats based on your daily routine and their trade signals

The above makes sense considering psychology or that mindset is a critical element in discretionary trading whereas it has no importance in automation or system design.

Therefore, a big yes, the systematic part and the discretionary part can be isolated and evaluated individually. Yet, a discretionary trader has the two options to just trade with his/her gut/feel or trade via rules that incorporates daily routine/trade signals. Remove the stats of ones daily routine and you've put a discretionary trader at a disadvantage...a trader that does not have the ability to adapt.

There's the another issue about rule base discretionary traders. If they don't know how to automate or don't want to automate their rules when such can be done...you can't call them gut/feel traders considering they are discretionary using a rule base trade method. Further, you can't call them system traders considering they aren't using any automation...many discretionary traders that fall into this category are also called "rule based discretionary traders" by choice...

They have made a decision that discretionary trading for them is better than automation trading.

P.S. I've done both and prefer discretionary trading. It allows me to take advantage of unusual events that occur multiple time every month via position size management.