In Star Trek, Captain Kirk believed that his leadership abilities helped him make good decisions in difficult situations. In contrast, Mr. Spock applied logic and reason, along with his perceived probabilities of success, to make his decisions.
These contrasting styles are similar to two opposing trading strategies; discretionary traders and systematic traders. Discretionary traders try to get by on their past experience and wits. They relay on their ability to make the right decisions in the heat of the trading battle. Systematic, mechanical traders do all their research after market hours, and follow a predefined plan for position sizing and entries and exits when the markets are open. They faithfully execute the plan they created based on past market behavior and probabilities.
Here are the differences between discretionary traders that rely on their instincts, intuition, and chart reading abilities and those who are pure mechanical systematic traders.
- Trade information flow.
- Try to anticipate what the market will do.
- Are subjective; they read their own opinions and past experiences into the current market action.
- Trade what and when they want, and have no rules to govern their trading.
- Are typically emotional in their trading and take their losses very personally.
- They use many different indicators to trade at different times. Sometimes they rely on macro economic indicators, chart patterns, or even macroeconomic news in an attempt to predict what the market will do.
- They usually have a small watch list of stocks and markets to trade based on their expertise.
- Trade price flow
- Participate in what the market is doing.
- They are objective and have no opinion about the market. Instead, they follow what the market is 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 usually unemotional when they lose because they realize the market was not conducive to their system at that moment, but they’ll win in the long term.
- Always use the same technical indicators for their entries and exits and never change course.
- Typically trade many markets because they are using a technical system based on prices and trends, rather than having to be an expert on fundamentals.
While discretionary traders are busy trying to digest what’s happening in the world, 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 maximizes their chance of success, especially if they are using a historically proven, profitable system. When you remove emotions and ego from trading, and control your risk of ruin with proper trade size and stop losses, you have a good chance of being consistently profitable in the market.
What kind of trader are you?