One of the main things that a trader can do to improve their strategy, is learning. In this sense, traders should be exactly like MMA fighters, specializes in one style, but also experienced in other styles to complement their abilities and make them able to adapt to different opponents. Whilst it might work for some to find their space and simply trade out of their box, there are benefits to learning and growing from a different method of trading.
Traditionally, I have espoused a system trading method. Please note that when I say system trading, I mean trading using a strong set of rules that are designed to be followed under all circumstances. This advice is based on what I have found to be the common problem with traders, that they allow themselves to be affected by the emotions of trading, and subsequently begin trading irrationally, being tugged in an opposing direction by fear and greed.
The discretionary trader seemingly does just that, trading to a group of subjective criteria. But this does not necessarily mean that the trader is not using a system. Discretionary trading can be to a system. The difference between system trading and discretionary trading is not that there is no system in play with discretionary trading, it’s that the system is adaptable depending on the market.
To simplify the difference, discretionary trading is trading based on decisions, and system trading is based on rules.
The most important feature that discretionary trading can learn from system based trading is that freestyle trading is usually a pathway to disaster. Everything should have a plan, otherwise, your trading is like throwing darts blindfolded, dangerous and inaccurate. A discretionary system should undertake to apply a select system that best relates to the assessment of the trade.
A system trader can learn much from the discretionary trader, by realizing that the one size fits all system will work only for certain situations. Hopefully, a fully evolved system will only trade certain types of market conditions to avoid trading in a market that does not support the system, but, realistically, the only way to identify this is the recognition that there are different market conditions.
Thus, we come to the salient point, that the best traders will likely benefit from a bit of cross-pollination between the two methodologies. A system trader would benefit from looking at the market like a discretionary trader in order to further improve their system. A discretionary trader would be best served using a system approach so as not to injure them by becoming a dart player.
The reality of both methods is that there are challenges to be faced when developing the trading plan. A discretionary trader will need to build multiple systems, with the potential to overlap depending on the market at hand, causing second guessing. The systems trader has an even longer road since the system trader has to create a system that works and weeds out unfavorable market conditions. This could remove potentially profitable trades and trading conditions, and every change will have both a positive and negative potential outcome.
So after all this, we can see the benefits and drawbacks of each approach. Ultimately, a lot of self-reflection is needed to understand which system will best suit you, and give you the best chance to trade to your strengths.
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