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kirk_spock                                                                                                                                                                                                                                                                                                             Discretionary Traders Vs Systematic Traders

In the classic Star Trek movies and television show Captain Kirk believed in his abilities to make the best decisions in the circumstances he found himself in. Mr. Spock contrasted against Kirk’s leadership style by using logic and reason along with probabilities of success to make the best decisions. These two styles are similiar to the very different strategies of traders, some discretionary traders try to get by with their experience and wits, they relay on their ability to make the right decisions in the heat of the trading battle. Mechanical traders do all their work outside of market hours and are only following a preconceived plan for position sizing and specific entries and exits when the markets are open, no decisions to make in live trading just executing the plan that was already determined to be successful in the long term based on past market behavior and probabilities.

Here are the differences between traders that rely on their instincts, intuition, rules, and chart reading abilities and those who are pure mechanical systematic traders.

Discretionary Traders…

  • …trade information flow.

  • …are trying to anticipate what the market will do.

  • …are subjective; they read their own opinions and past experiences into the current market action.

  • …trade what they want and have rules to govern their trading.

  • …are usually very emotional in their trading and taking their losses personally because their opinion was wrong and their ego is hurt.

  • …use many different indicators to trade at different times. Sometimes it may be macro economic indicators, chart patterns, or even macroeconomic news. Many discretionary traders are trying to game what they believe the majority of other traders will be doing based on market psychology as if it is one big poker game.. They are trying to form an opinion on what the market will do.

  • … generally have a very small watch list of stocks and markets to trade based on their expertise of the markets they trade.

Systematic Traders…

  • …trade price flow.

  • …are participating in what the market is doing.

  • …are objective. They have no opinion about the market and are following what the market is actually doing, i.e. following that trend.

  • …have few but very strict and defined rules to govern their entries and exits, risk management, and position size.

  • …are unemotional because when they lose it is simply that the market was not conducive to their system. They know that they will win over the long term.

  • …always use the exact same technical indicators for their entries and exits. They never change them.

  • …trade many markets and are trading their technical system based on prices and trends so they do not need to be an expert on the fundamentals.

While discretionary traders are busy trying to digest what fundamental news and information mean, systematic traders are taking the signals they are getting from actual price movement in the market. Systematic traders are not thinking and predicting what the market is going to do, they are reacting to what the majority is doing based on their predetermined system’s entry signals.

For the average trader being a 100% Mechanical System Trader usually maximizes the chance of success in the markets, especially if you are using a historically proven profitable system. If you are removing the emotions and ego out of your trading and are controlling your risk of ruin with proper trade size and stop losses, then you have probability on your side of joining the consistently profitable traders in the market.

Now what sort of trader do you want to be?