Methods and systems
Discretionary vs systematic trading
3 min
Before the specific methods, understand the two broad approaches to making decisions.
Discretionary trading
The trader reads the market in real time and decides each trade using judgement, experience and context. Rules guide the decision but the human makes the final call.
- Strength: adapts to conditions a fixed rule never anticipated.
- Weakness: vulnerable to emotion, fatigue and inconsistency. Two identical setups can be traded differently on different days.
Systematic (rule-based / mechanical) trading
Every decision follows predefined rules with no judgement in the moment. Taken to its conclusion, a system can be coded into an automated strategy (an "expert advisor" or "robot").
- Strength: consistent and testable. You can backtest the exact rules on history and remove emotion from execution.
- Weakness: only as good as the rules; a system blindly followed into changed market conditions can lose steadily.
In practice
Most traders sit somewhere between the two — a defined system with a little discretion, or discretion disciplined by hard rules. The value of leaning systematic is that it forces you to define your edge precisely enough to test it, which is the theme of the rest of this chapter.
This content is for educational and informational purposes only and is not investment, financial, tax or legal advice. Trading and investing carry risk, including the possible loss of capital. Any performance shown by third-party tools is hypothetical and not a promise of future results. Do your own research and consider professional advice before making any decision.