Do you use a discretionary or a mechanical system to do your trading? The mechanical systems have their main basis in technical analysis and are applied systematically. Discretionary systems mainly use the experience, intuition, and judgment of the trader to determine the entries and exits of a trade.
The main question remains which one of the two is best.
The answer is somewhat diluted as it depends on your personal experience.
Advantages of mechanical systems
- You can automate and backtest mechanical systems easily.
- Their rules are rigid and work on the basis that the trade is there or not there. There is no room to deviate from the rules.
- As compared to discretionary traders, mechanical traders are not prone to emotions.
The cons of mechanical systems
- Many users have problems with or don’t know how to do backtesting.
- The systems require tick data to produce accurate results
- The Forex market is unstable. It always changes.
- Even though the market conditions might appear similar, they always vary.
- The fact that one system works well now, does not necessarily mean that it will do so in the future.
The advantages of discretionary systems
- Discretionary systems can adapt to new market conditions easily
- Trading operations come from experience
- It is easy for experienced traders to know the trading signals that are bound to bring more success.
The cons of discretionary systems
- It is impossible to backtest or automate discretionary systems. This can be attributed to the thought process that a trader has to make.
- For a trader to trade successfully, it may take a lot of time to gain the needed experience.
- Discretionary systems do not favor beginners.
Which one is better?
When choosing between discretionary and mechanical systems, it is wise to go with the one that suits your personality. For example, if you have problems in analyzing the trading signals and adjusting on the fly to changes in market conditions, opt for mechanical as opposed to discretionary systems. That way, your judgment will not come into play as much because you will be taking the trades that your system picks for you. Also, you should opt for mechanical systems if the psychological barriers that affect many people such as anger, fear and greed also put you in unsuitable positions. This is because with mechanical systems you will only have to follow the pre-established rules.
On the other hand, if you are an experienced trader that can have a great feel for market trends, then, you are better off with discretionary systems. This gives you the opportunity to monitor the market and make good decisions based on your observations. For example, if your target is 60 pips on a long trade, but there is a sudden change in the market trends, you can move your target higher to say, a 100 pips and make more profit in the trade. However, this does not mean that discretionary systems do not have rules. You have to put some rules into consideration such as your position size and the conditions on the market.
The main reason for choosing discretionary systems is that most trades depend on price behavior. In that case, it is difficult to predict price behavior or the results of every trade.
To that end, discretionary traders have some rules and conditions that govern their trades.
Here are some factors to put into consideration regardless of whether you opt for mechanical or discretionary systems:
1. Your Forex trading system should always fit your personality
2. Have rules and follow them.
3. Take enough time to create a perfect system that works for you
4. To preserve your capital, use a demo account before going live with any new discretionary strategy you want to use or test.