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System vs Discretionary Trading… The Answers

There has always been a long running battle between traders as to which method is best. System traders will tell you that their method is best, and the Discretionary traders will tell you that their method is better.

So, who’s right and who’s wrong?

Exactly… No one, it all depends on what suits you best.  All I can do is give you the pros and cons from my point of view. And to tell you why I trade the way I do and how it may benefit you if you are struggling.

As I always say, trading is easy. If price is going up buy it and if it’s going down sell it.

Will I be right all the time?

Of course, NOT!

Do I need to be?… Nope. The only trick to trading is that you need to be in it to win it. If you can’t pull the trigger or you lack the confidence to trust your plan. If you’re uncertain of your entry signals, be that candle stick formations or trend line breaks. Or even bounce at support or resistance. If any of those issues strike a cord with you… then look no further this post will help you.

Because at some point you will need to decide which trader type suits you best…

Both discretionary trading and system trading have the potential to be equally as profitable, so the decision should be made based on your personality as a trader.

Some traders will instantly be able to recognize which type of trading is more suitable for them, while other traders may need to experience both types of trading before they can make a good decision.

 

Discretionary…

I recently read this on a day trading blog

“Discretionary trading is decision-based trading (the trader decides which trades to make based on current market conditions), and system trading is rule-based trading (the trading system decides which trades to make, regardless of current conditions).”

Which kind of makes sense and it does seem to be the general consensus of a lot of traders. However, here lies a problem a lot of new traders have. With that description it implies that discretionary traders don’t have rules…

And that is why a lot of newbies and some old hands fail to make money. Because system or discretionary you must have rules or how do you test it?

How do you make sure you are repeating the same processes in order to make money if you have no rules to guide you?  Of course, a lot of it really boils done to excuses and laziness.

“I’ll write them when I have time or when I know they will work” and with this they start trading… no real back testing and probably very little forward testing or paper trading. Which brings about a lack of confidence, mix that with a couple of losses and you have some give-up soup.

I spent four years trying (hate that word) “not doing” discretionary trading. Because I never really sat down and wrote out my rules.

system writer

 

Too damn hard and a lot of them if you really want to write them out properly. And what I mean by properly is to take all decision away from you when you are in the market.

Because that’s when you make mistakes, that’s when you get messed up. Making decisions while you have money on the line…

 

Discretionary Rules

That’s why you need to have a lot of rules as a discretionary trader… much more than a systems trader (which is why I switched).

Think about it…

If you take trades that bounce off of support, you have to describe what you define support to be. Is it an area or a price? How many touches does it need to have to be support? How many touches or on which time frame does it have to be in order to be classed as major support. Then you would need to do the same for resistance… takes time and effort. But if you want to be consistent you have to do it.

What about trend lines? Do they go through the wicks but never the bodies? Or do yours not cross the wick either? Do you know which method you use and why you use it? Have you ever thought to test which way works best? Or do you just take someone else’s word for it. Even though they may have different beliefs and a different way of looking at the market to you…

Then we have high’s and low’s. Have you ever stopped to define how you will decide what is a high and what is a low? Did you know there are different ways of working out highs and lows? Would you believe that I have tested two different methods and found that one has an exceptionally good record as an exit management tool? Have you even thought about what makes a high or a low to you? And why that matters…

And then of course we have candle stick formations or price action whatever you may call it. Because there does seem to be hundreds of variations out there for names and meanings of the candles. If you want to be a discretionary trader who follows price action then you will need a set of rules to define the formation/pattern or which candle it is. And you will also need rules to tell you what to do when you see it.

That’s a lot of rules and I’ve barely scratched the surface…

 

Myth

You’re probably thinking about now that what I have just said is over the top.

“I know traders who are successful and haven’t written out a thousand different silly rules” …

Ask yourself is that true… or is it an excuse.

Because here’s the deal. I don’t know any successful trader… and by successful, I mean been around for years and not just flavor of the month… who hasn’t got all this detail either written down or had to spend years practicing to get this information down pat. So that it is permanently at the forefront of his/her mind when trading.

There was a subtle clue thrown in there in case you never noticed. If you write it down and make it routine and maybe into a checklist you will learn it so much quicker than just trying to practice by yourself.

So right about now you are probably wondering why I became a systems trader…

 

System

System trading is rule-based trading, where the decision to make a trade is based entirely upon the trading system. With system trading decisions are absolute and do not offer the opportunity to decline to make a trade based on the trader’s discretion. If the criteria are met, the trade is taken.

If I have discipline I don’t even need confidence to trade a system. I don’t even need to have many rules at all. To write rules out for a simple system that makes money can be done very quickly.

I never need blame myself for a losing trade ever again, it was the systems fault. Joking aside, if you are one of those traders who are struggling with taking losses. Because those losses seem to affect how you feel about yourself… then switch to a system. It’s a start to help you get used to losses.

Then is no middle ground with a system. It is always very clear, you either have a signal so you take the trade or you don’t. No should I or shouldn’t I. You don’t need to make predictions. You don’t have to spend hours analyzing the charts.

My Sunday analysis takes from 20 -30 minutes following my rules. And at the end of it I know exactly which symbols I will be following that week, and exactly what I am looking for on each symbol. Thus, leaving me with only 5 or 10 minutes work to do each day looking for entry signals or signals to move my stops (only ever into profit) because I use stops to manage my exits.

 

System Rules…

Let me give you an example of a very easy system that still makes money. You can back test it very easily and very quickly to gain confidence. And then you have a very simple money-making system for yourself…

I’ve tested this on a few charts… Will it make you a millionaire?   Eventually if you are young enough. Tomorrow?  Of course not, but it will make you profitable and it is a system you can build upon.

Let’s not forget, McDonalds, kfc and Apple are all built on systems. That started with very simple systems and then only added complexity when it improves upon the system. Our trouble as traders is that we seem to want to start with complex from the get go.

Nothing works like that… Did they start with the smart phone? Could they have started with a smart phone? Or did they need to completely understand the basic phone first and then improving it as technology allowed?

 

Could you imagine going from a horse to a Bugatti Veyronfast system

 

 

 

 

 

 

 

 

Simple system

 

 

 

 

 

No, they started with a simple model T ford. Learnt how to build the s@%t out of that and then added complexity.

You will fare so much better as a trader if you follow those simple steps. Get a simple system, trade it consistently, mistake free and then you can add a little complexity to improve your results. Rinse and repeat…

 

The Completely Simple 50 ema System

You may even have heard this before, maybe you even tried it. The trick with any system is to place at least 30 trades and have 80% of them mistake free before making any kind of decision about it…

Here are the rules:

  • Open a 4hr chart. If price is above the 50ema you wait for it to close below the 50ema then enter at market with your stop above the most recent high.
  • If price is below the 50ema you wait for it to close above the 50ema and then enter at market with your stop below the most recent low.
  • Exit at the next cross of the 50ema and remember to re-enter in the opposite direction.
  • This is an always in strategy.

Try it… it works.

System

 

Conclusion

For me it’s a no brainer. If you are struggling to consistently make profits trading switch to being a systems trader.

Write out your rules…

Follow those rules mistake free.

A mistake being to not follow your rules, if you have no rules everything you do in the market is a mistake.

Back test those rules so you get to know the system and have confidence with it…

Trade it and make money.

If you need help feel free to contact me at callum@specialfxacademy.com or visit our website specialfxacademy.com

If you want to get to consistent fast then our new Trader Accelerator Program is just what you need. Where ever you are in your trading to consistent in six weeks with our new proven system. That completely reprograms your mind to a trader’s mindset and helps you find that system that works for you rather than against you. Take a look by clicking here.

 

 

 


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Callum McLean

Co-Founder and Trading Psychologist at Special FX Academy
Trading Psychology Coach and Certified NLP Coach. It is my belief that trading is 99% Psychological. And it is by understanding and improving your psychology, that you can be a successful trader. Success is a formula that everyone can and should learn.
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