Discretionary Trading vs. Rules-Based Trading [ Ссылка ] This question is one which has been puzzling traders ever since analysis became available. In the days before you could easily produce moving averages, trading indicators, etc., there was a much greater emphasis on examining paper charts, spotting possible trends, supports, and resistances, and trading with discretion on the basis of your beliefs.
While you will still find some traders who swear that they achieve a trading edge by their personal instincts and knowledge, an increasing number of traders have come to rely on mechanical systems. Though they could be, mechanical systems do not have to be mechanized or computerized, but can be implemented by the trader making decisions according to a strict set of rules.
Trading mechanically has a number of advantages, particularly for novices who may not fully understand the markets. The financial markets tend to operate counter intuitively, so if a beginner was to trade according to his feelings and gut reactions, there is little doubt that he would lose. The first advantage of a mechanical system is that it eliminates emotional reactions which would not serve you well.
A mechanical system can be rigorously back tested against the historic performance of the markets. This allows the trader to determine that the system is profitable, and also to tweak any variables to see if it can be improved. Having confidence in the trading system is important, as under the stress of live trading it is very easy to try and second-guess, usually with poor results. If you have confidence in the system that you have developed, this gives you an incentive to keep following it even during the inevitable times when it will not be making you a profit.
If a mechanical system is adopted, there will always be a clear and unambiguous signal telling you to enter a trade or exit a trade. Once again, this is important as under the stress of trading it is easy to make mistakes. The system should cater for all eventualities, and always have an answer to what you should do next.
Traders who use a discretionary system vary in their approach. Some like to have a mechanical system show them the trades that it finds, and then decide for themselves whether or not they will take the positions suggested. Others might claim to look at a chart and spot certain patterns developing that they have previously been successful with. The truth is, that if a trader is making a profit by doing this, he has probably paid many times over in the past to gain the experience necessary to determine the winning positions.
So in summary, unless and until you can develop an instinct for the markets it is much preferable and safer to follow a mechanical system of trading. Provided you are successful with this, there may be no need to ever decide to use discretion. If you decide to give discretionary trading a try, then be prepared to lose while you are learning, and make sure that you learn a lesson from every loss so that you minimize repeating your mistakes.
