Discretionary vs. System Trading: A Comprehensive Comparison

Discretionary and system trading are methods commonly used by stock traders. In discretionary trading, you make your own decisions on each trade. In system trading, you utilize a specific set of rules for each trading situation. Both of these methods have some merit and a few potential drawbacks as well. Here are a few things to consider about discretionary and system trading.

Discretionary Trading

Individuals who engage in discretionary trading look at each trading opportunity as unique. Discretionary traders typically have a great deal of experience in the stock market and rely on this experience every time they make a trade. Instead of sticking to a particular system, they go with the feel of the market. They base a lot of their decisions on market sentiment and past experiences. Some discretionary traders will still use a specific trading strategy with rules. However, when it comes time to place a trade, they may deviate from the rules and use their own discretion. They might enter into a trade before the trade entry has been clearly indicated by their trading system. They might stay in a trade longer than what their trading system tells them. They might also get out of a trade more quickly than what their system indicates because they feel bad about it. 

System Trading

System trading is a type of trading that follows a particular set of rules and regulations. With this type of trading, there will be clearly defined parameters for every trading scenario. If you utilize system trading, you will follow the rules to the letter. This system will govern your money management and the manner in which you trade. 

With system trading, you will follow the parameters of the system when deciding on when to enter a trade. The system might have a custom indicator that plugs into your trading software in order to give you clear entry signals. Once you enter into a trade, the system will also tell you when to get out. It may help you determine defined take-profit levels as well as stop-loss levels. 

If you use system trading, there is no room for deviation from the plan. You stick to the trading system, and you do not use your own discretion when it comes to making trading decisions.

Choosing a Style

Both of these strategies can be beneficial depending on what type of individual you are. If you are a new trader who does not know very much about the market, you may want to stick with system trading. Find a profitable trading system that works and then stick to the rules. If you have a lot of experience in the market, you may lean towards discretionary trading. This type of trading is only for those that are very familiar with the market and understand the subtle nuances of it.