The difference between discretionary and system traders


There are, generally speaking, two types of traders in the markets. One is the discretionary sort. The other is the system type.

A system trader is one who employs very specific and quantifiable rules for all parts of their trading. That means their entry and exit rules are very clear and concise – generally based on some technical analysis methods (indicators, etc.). The rules for position sizing are also included as part of the system.

There are a couple of major appeals to system trading. One is the idea of a money machine – an automated process by which profits can be extracted from the market. The other is the idea of removing human emotion from the equation by having a very rigid method for trading requiring no thought.

Discretionary trading, on the other hand, doesn’t have the same rigidity of system trading. This is not to say discretionary traders don’t have a system or trading rules. Quite the contrary. It’s just that the discretionary rules aren’t so easily described in a programatic fashion and trading decisions are often more on the basis of a trader’s experience.

Because discretionary trading relies not on what a computer says, but rather on the decision-making of an individual, it is subject to the emotional influences that system traders seek to bypass. This may seem to imply that it is a less effective method, but that isn’t necessarily the case. It is often said that a good discretionary trader will beat a system trader in the long run because he will have the flexibility to adapt to changing market circumstances, which rigid systems cannot easily do.

Here’s the thing, though. Discretionary trading at a successful level comes from experience. There aren’t too many folks who can just up and start trading in the market profitably from a discretionary standpoint, yet many try exactly that. New traders are generally better off starting from a system perspective, using that as the basis from which to build experience over time.

If you like this post or find it informative, I encourage you to sign-up for the newsletter.

Also subscribe to the blog feed and/or follow via Facebook or Twitter.

About the Author
John Forman, author of this blog, has traded for more than 20 years, is a professional market analyst, and authored The Essentials of Trading. He is an active participant in trading forums, consults for trading related businesses, as published literally dozens of trading articles, and has been quoted in a number of books and in the media.
** See John’s full bio.

RhodyTrader on Twitter Counter.com 

Similar Posts:


  • http://www.trade-ideas.com/StockInfo David

    What about those traders who employ a hybrid of these two camps? I mention this possibility because several of our subscribers who are automating their trading strategies watch what these bots are doing and, at their descretion, will flatten their positions (or choose to double it) in such automated strategies at the click of 1 button.

    Often automation or system trading will initiate the entry decision (the scanner identifies an opportunity, the pattern the tool is scanning for has been sufficiently backtested as to show a discernible, high probability of success, and the automation initiates the trade) and the trader will then either let the automated trading rules perform the exit or decide him/herself to exit the position.

    See a 5 minute video that demonstrates this hybrid approach using the suite of trading tools from Trade-Ideas: http://www.youtube.com/watch?v=RHmgepmICec&feature=channel

    • http://www.theessentialsoftrading.com John

      David – I was hoping someone would pitch in on a split approach. :-)

      Actually, one could make the argument that if there’s any discretion at all then one isn’t really doing system trading, but I think that’s probably a bit too semantical. To your example, though, being a part system trader does strike me as having some risks. If the idea is to take the emotional element out of things (as many traders claim) then having a non-systematic element involved (like the discretionary exit you mentioned) rather defeats the purpose.

  • http://www.trade-ideas.com/StockInfo David

    We just can’t live in a world of labels – certainly in a world defined by just one or the other. The video demonstrates (toward the end of the 5 minutes) the thinking going into the manual mode to exit the positions. It’s a messy world out there, but your trading benefits if you can have an assortment of tools (certainly ones that leverage you into multiple persons trading opportunities that no 1 person could in a risk managed environment).

    To get to this ability in your trading (as you well know) you’ve got to stop holding a hammer and looking at the world as if it were full of nails.

    Great, thought-provoking article!