What is discretionary trading, and what are the pros and cons of this type of trading? Is it really better than auto trading?
After talking about automated trading, the time has come to talk about the concept of discretionary trading, i.e. the opposite of automatic trading, often incorrectly called “manual”.
Over the past few years, automatic and discretionary trading have been hotly debated. Obviously, neither approach has a well-defined answer due to the particular nature of the market negotiation.
Discretionary trading is usually the first approach in trading. Newcomers need to learn the basics of discretionary training if they want to implement their skills in more advanced systems.
We can safely say that to develop your own automatic trading system, you need minimal discretionary trading experience to understand the basics of risk management and money management. These elements are necessary to develop a trading system and trade precisely, in a discretionary way.
Let’s see together the strengths and weaknesses of discretionary trading and compare it to automatic trading.
What is discretionary trading
Discretionary trading is the type of trading which consists of only human intervention in financial market trading. The decision-making process is therefore totally discretionary, from the calculation of the risk parameters, to the analysis of the market, up to the click on the platform to trade. Basically, nothing is automatic. It’s all at the "discretion" of the trader who has full responsibility for his own destiny.
A professional trader who has a discretionary approach usually has an experience that is difficult to replicate by an automatic bot which has the "limit" of not having that plus that the discretionary trader has, i.e. a brain that is notoriously faster than any computer.
Thus, discretionary traders have experience stored in their brains, which makes them distinguished from automatic traders. Usually, the professional (discretionary) trader offers higher returns than a classic automatic trading system, a type of trading that in most cases still needs human intervention to be profitable.
The benefits of discretionary trading
First of all, we can safely say that discretionary trading is preparatory to automatic trading. It is impossible to learn how to structure an automatic trading system without knowing discretionary trading basics.
All the steps necessary to learn to trade in a discretionary way ensure that the trader acquires strictly personal experience and know-how, totally linked to his own personality and therefore something strictly unique, in stark contrast to automatic trading’s standardizing logic.
Furthermore, having gained some experience, the discretionary trader is able to internalize the market, better than any automatic trading system, developing a sort of "sense of danger", or the "nose" for the occasion and through the recognition of market dynamics and repetition patterns, it is able to understand if it is within a market that can offer opportunities or if it is within a relatively dangerous market.
Disadvantages of Discretionary Trading
The trader, in his experience, will have to face many obstacles. The first of all is that of self-discipline, i.e. the self-discipline which in many cases, when it is neglected, causes the trader not to be lucid in the face of the choices he will have to make, therefore he will find himself facing very difficult periods from a psychological point of view due to the lack of lucidity, which also happens to professionals who manage to get out more quickly out of this time impasse.
Purely discretionary trading is entirely dependent on the trader, his mood and the time he has available. The trader cannot trade lucidly if he is physically and psychologically ill, so it is crucial to maintain good physical and psychological health in order to perform discretionary trading effectively.
The human factor in trading
We are talking about two totally distinct types of trading and which are hardly comparable from a strictly operational point of view. They are two different approaches, two different ways to trade and both can be done badly, as well as efficiently.
The debate on discretionary trading and on automatic trading, makes no sense, if not for those who use a low-league rhetoric to row in favor of their own approach, perhaps a "magic" method, be it automatic and discretionary, in order to earn from the sale of some courses or from some automatic system that promises stellar earnings in a short time.
We therefore recall that both approaches still require a certain degree of experience, experience acquired over time and through work, both personal and professional. Therefore, debating which type of trading is better than another, in a moment when you have no experience, is just a waste of time. It’s a bunch of words thrown to the wind.
As previously mentioned, the initial steps for trading are initially carried out with discretionary trading. We will eventually move on to what may be an automatic trading system which, as mentioned in a previous article, supports the trader as in most cases the (expert) intervention of a human is still required.
Original article published on Money.it Italy 2023-05-27 13:30:00. Original title: Il trading discrezionale è davvero migliore del trading automatico?
