Discretionary vs System based trading

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Last weekwe discussed the pros and cons of using a systematic approach to trading. What Is Discretionary Trading? Discretionary trading is when a trade is taken where a decision has to be made on entry, exit, and position size.

It can be just one of these or it can be all. Most of the trades made on Wall Street are made with some type of discretion. Here are a few: You never exactly know what you have. More to number 1. Because discretion was taken. If one is relying upon their gut, they can in no way know if that same intuition will achieve equal returns over time.

You have a healthy position in a stock and the stock has quickly moved against you and you have a loss. You have a decision to make. Do you take the loss? If you decide to exit a piece, what percent of that piece do you exit? Do you not exit at all? Or do you add to the position because the market dynamics are beginning to turn in your favor?

System trading vs discretionary trading traders have all this figured out. Obviously this trader is under a stressful situation and his decision-making process is going to be challenged here. Of course it will. Now go further — what happens if they decide to have a second, third and fourth cup of coffee? Will their decision-making process remain the same? Go the other way, what if they had a great trading day the day before?

Will their decision-making process be the same versus a day following a bad trading day? I can give you hundreds of tiny, incidental events drinking a cup of coffee system trading vs discretionary trading certainly incidental, yet it affects performance both good and bad and once you start realizing this, you realize that there is an enormous amount of potential chaos in every single trading system trading vs discretionary trading.

More structure is nearly always better than less structure. This is true in sports, trading and anything else in life. Take two shortstops of equal abilities at age Over the next year, one takes well-placed, hard-hit ground balls every day under the supervision of a good coach. Who is going to be the better player in a year? Take the structured plan, or take the chaos? I could go on here but remember from last week, their are also many negative aspects to systematic trading.

Why Discretion Can Be Good 1. Because for many people, it works. And after writing the above, the following words say a lot. I personally know, and have seen the statements, of many profitable discretionary traders.

In fact, the other day Don Miller sent me his statements for the year. And I can give you a list of other names of profitable discretionary traders if you want. The fact that many of these guys exist says a great deal. I have seen discretionary traders make my own research better.

We once asked him to keep a journal to see if we could systematize what he saw. It was a useless exercise. The ability to change course: When very obvious market opportunities arise, discretionary traders can system trading vs discretionary trading them. But there are a few times in every year where there is money on the table to be taken. And the better discretionary system trading vs discretionary trading will be there to capture theses opportunities. Whereas systematic trading is boring very boringdiscretionary trading can be very interesting.

As I said last week, for some people this means little; for others, this means a great deal. Wrapping It Up So there you have it. Two weeks of columns laying out some of the bigger pros and cons of systematic and discretionary trading. Which is correct for you? Only you can answer that. Both have negatives, both have positives, system trading vs discretionary trading most importantly, both system trading vs discretionary trading many money managers and professional traders who have made healthy amounts of money using each approach.

You can find it at www. At Connors Research, we are using it as an overlay to many of our best strategies to make them even better -- now you can, too. Larry Connors has over 30 years in the financial markets industry. For over 15 years, Larry Connors and now Connors Research has provided the highest-quality, data-driven research on trading for individual investors, hedge funds, proprietary trading firms, and bank trading desks around the world. The Connors Group, Inc.

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