What Does A Discretionary Trading System Mean?

In Continuation with Previous Article What Does A Mechanical Trading System Mean?

Discretionary trading is decision-based trading (the trader decides which trades to make based on current market conditions. Discretionary traders have rules to follow, apply those rules based on their Tape/Screen Reading experience and Intuition gained over years. The discretionary trading system is comparatively complex than a rule based trading system.

Discretionary trading is not making random decisions, taking trades based on Impulses or Emotion, or rejecting trades where you failed to Pull the Trigger due to nervousness. Discretionary Forex trading does not replace discipline — indeed, you must have excellent self-discipline to pull it off, and it is a great way to develop it

From one trade to the next, there may be significant differences in how the trader’s strategy is implemented. Trader’s decision-making process is subjective that discipline must be in the forefront at all times. Discretionary trading means using your judgment and intuition as part of the trading process

Example of Discretionary trading  we have a Rising wedge chart pattern in below chart

Plotting or identifying a falling wedge isn’t an exact science but an art. The only way one can hone their skills is by experience. Still, every time will be different as a trader will need to adjust their analysis accordingly. Some Traders might buy at Support and aviod shorting as volume are not that Great. Few traders might short it thinking Volume will come after the breakdown.

It comes with traders experience and more importantly discipline as to exit trade when they are proved wrong by market. Trading on Chart patterns like Continuation Patterns,Reversal Pattern comes as part of Discretionary trading. For discretionary trading is when you want to base your trading on chart patterns, such as the head and shoulders, or on candlestick patterns such as the Harami. Trading Software is fairly proficient at identifying a limited range of chart patterns, particularly candlestick patterns which are easily programmed, but may not possess the intelligence to understand if these patterns are occurring in significant situations.

For instance, one should never trade on the basis of candlestick patterns alone, but apply other methods of technical analysis to see if the indicated outcome is to be expected. In the case of Cup and Handel , this can be interpreted in many ways, and it takes an experienced eye to be sure of the indication.

The most important advantage of a discretionary trading system is that you can adapt your trading to the current market conditions,Like with current volatility You might think of moving from a 15 mins candle to a 5 mins candle to take your trading decision. You must learn to develop your intuition in a way that reflects the operation of the market, while retaining calmness and discipline so that your emotions do not mislead you. However the ability to adapt to circumstances is an important strength of discretionary trading over a mechanical system.

Discretionary Trading

  • Adapts to market conditions
  • Trades are not automatic
  • Easy to second-guess decisions
  • More control

The drawback of a discretionary system is that many traders are prone to second-guessing themselves. They may actually be very poor at deciding when to trade and when not to, and therefore a more systematic approach would be better. Discretionary systems are susceptible to the psychology of the trader; being too greedy or fearful can destroy the profitability of a discretionary trading system in a hurry.

Success of using a discretionary trading system largely depends on the trader’s familiarity with the system

Leave a Reply