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August 21

System vs Discretionary Trading… Which Is Best?

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

So, who’s right and who’s wrong?

No one, because 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. All you have to do is follow your rules!

Will I be right all the time?

No, 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 and take the trade.
  • Or you lack the confidence to trust your trading plan.
  • If you’re uncertain of your entry signals. Be those candlestick formations or trend line breaks. Or even a bounce at support or resistance.

If any of those issues strike a chord with you… then look no further as this post will help you immensely.

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. In contrast, other traders may need to experience both types of trading before making 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).”

That kind of makes sense, and it seems to be the general consensus of many 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 repeat the same processes to make money if you have no rules to guide you?  Of course, a lot of it really boils down to excuses and laziness.

“I’ll write rules when I have time or when I know they will work.”

And with this, they start trading… no accurate backtesting and probably very little forward testing or paper trading.

This then brings about a lack of confidence. Mix that with a couple of losses, and you have some sort of 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.

It seemed too damn hard, and there would need to be many of them if you really want to write them out correctly. And correctly means that all your decisions will be made before you enter 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 many 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 a level of support?
  • How many touches or on which time frame does it have to be classed as major support.

Then you would need to do the same for resistance… it 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 outstanding record as an exit management tool? Have you ever thought about what makes a high or a low to you? And why does that matter?

And then, of course, we have candlestick 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.

Suppose you want to be a discretionary trader who follows price action. In that case, 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 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 I don’t.

Here’s the deal.

I don’t know any successful trader… and by successful, I mean been around for years and not just flavour of the month… who hasn’t got all this detail written down or had to spend years practising to get this information down pat.

So that it is permanently at the forefront of their 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 much quicker than just practising by yourself.

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

Systems Trader

System trading is rule-based trading, where the decision to make a trade is based entirely upon the trading system. 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. I have no say in the matter.

If I have the discipline, I don’t even need the 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 made very quickly.

“I never need blame myself for a losing trade ever again; it was the fault of the system.”

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.

There is no middle ground with a system. It is always apparent, 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 which symbols I will be following that week and precisely what I am looking for on each currency symbol.

Thus, leaving me with only 5 or 10 minutes of work to do each day looking for entry signals or signals to move my stops (only ever into profit) because I use Stop Loss Orders to manage my exits.

System Rules…

Let me give you an example of a straightforward system that still makes money. You can backtest 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, McDonald’s, KFC and Apple are all built on systems. They started with elementary systems and then only added complexity when it improves upon the whole system.

Our trouble as traders is that we seem to want to start with complex from the get-go.

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

Could you imagine jumping from a horse to a Bugatti Veyron?

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.

My Pleasure.

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 decision about it.

Here are the rules:

  • Open a 4hr chart. If the price is above the 50ema, you wait for it to close below the 50ema, then enter the market with your stop loss above the most recent high.
  • If the price is below the 50ema, you wait for it to close above the 50ema and then enter the market with your stop loss 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

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 is not following your rules. If you have no rules, everything you do in the market is a mistake.

Backtest those rules so you get to know the system and have confidence in it.

Trade it and make money.

What you should do right now!

If you are struggling to successfully extract consistent payments from the markets, then I do suggest that you take a look at my “Do It Yourself” Trading Course.

In this course I will personally coach you the necessary technical and psychological skills needed to be a successful Prop Forex Trader and create the life of your dreams, whatever they might be.

Callum McLean


I believe that everyone has the right to be financially free. I founded "Wealth 4 All", an organization that guides people from all walks of life to achieve that goal, either by teaching them how to trade or through passive investments. Connect with me to get started today.

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