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A Trading Lesson: Discretionary Vs. System Training | Financial Planning Tips

A Trading Lesson: Discretionary Vs. System Training

Okay, so you’re ready to become a day trader. You’re all excited to start your trading career and then someone asks if you are going to become a discretionary or system trader. Huh? What? It’s okay. The two terms are actually used quite literally and they refer to how a trader makes his or her decisions.

System Trading

System trading really is just what it sounds like. The trader uses an automated system, usually computer software, programmed with certain criteria to make trading decisions for him or her. System trading is absolute and the trader puts the burden of decision making on the system. Once the decision is made, the trader usually just approves the trade and lets it go without any further consideration. In some cases, the software may be fully automated so that it makes trades without any manual input from the trader. This is a good system for novices who are not quite confident in their instincts yet. Some personalities are more suited to system trading than others. It is also well suited to “left-brain” people who tend to think extremely logically and have no problem letting a computer control their trading activities. While this may seem like a nightmare to some people, many consider it a relief.

Discretionary Trading

Discretionary trading falls into two categories. The trader may base his or her decisions on the information available and then take action, or he or she may use a trading system as a starting point. The big difference is that discretionary traders that use systems have the opportunity to approve or decline a trade based on their discretion, which is why it is called discretionary trading. Other discretionary traders may not use a specific software system, but, instead, utilize their own collection of resources, knowledge, and experience. Generally speaking discretionary traders are people who like to control their lives and are leery of putting their financial future in the hands of a machine. Creative people and artists who typically fall into the “right-brain” category of thinking are often well suited to be discretionary traders. People who also have a lot of market experience and confidence are also more likely to be discretionary traders.

While personality types are a good indicator, there is no hard and fast rule that says all “right-brain” thinkers should be discretionary traders and vice-versa. Many people have aspects of both types of thinking. Additionally, it is possible to switch back and forth between the two, but you can’t really combine them. A discretionary trader may use a system to base his or her decisions on, but he or she ultimately has veto power. System traders follow the advice of their software and if they do decide to veto a trade, technically speaking, they are venturing into the realm of discretionary trading. The best advice for new traders is to experiment with both types of decision-making models and find the one that suits them best. Make sure to study experienced traders, like Tim Sykes, to find out what models they follow as well.

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