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Discretionary Trading VS Algorithmic Trading

Discretionary Trading skills and limits

In previous articles we discussed how the psychological factors affect predominantly in discretionary trading. EN_210x90_06-spread_V155

We have shown the greatest risks in trading are related to the emotions that often do not allow us to work with discipline. Often algorithmic trading is the final evolution of a path inside trading. It starts with studies of technical and fundamental analysis; it all seems so simple.

Then every day we encounter difficulties in the market; over time you realize that being able to hold off the emotions is complex. Above all we realize the mood-related transactions (overestimation of ourselves in case of gain or underestimation of ourselves in case of loss) tend to affect not only the performance of the portfolio, but also our own mental well-being, which affects the quality of life of the trader.

Trading Systems

So after a few years of experience in the markets as a discretionary trader often you switch to use a trading system. This will make the trading system (and not a trader) the operations manager of trading (no matter what the trader has built or chosen). With the use of the trading system you have a phenomenon of irresponsibility of the trader, his mood, his quality of life will be affected to a lesser extent. However, be careful in thinking the trading system is the solution for the stress, the 'anxiety and the work of the traders involved. Also following a trading system requires having to deal with difficult situations.


When it is important to follow a trading system

There will be cases where the system will suggest an operation opposite to what the trader believes will happen. Perhaps it will show one "short" the day before of a possible announcement by the central bank of a Quantitative Easing. This will stress the trader, who must have strict discipline for making mistakes. A situation far worse when you have to manage a trading system is in periods of draw down, the trader will have to decide whether to continue to follow a system loss. In this case it will be necessary to have discipline. It will be important to plan before the use of the Trading System, the stop loss system, which will be reported by the values of the Draw Down or Profit Factor. Never let anything unplanned happen. The trader should already know what will happen to its portfolio if the trading system will face decline, but above all he must set the values by which to consider the system decayed.

Obviously we are pausing on the psychological aspect of the management of a trading system, leaving everything to do with the technical aspect:

  • programming of a trading system (taking care of the Over fitting),
  • construction of a trading system, then we would have a way to consider these issues and to build together different types of trading systems.


We arrive at a conclusion, what type of trading is best? Well we will tell you our point of view. We prefer operations such as intraday, discretionary trading, this is for a number of reasons and can be summarized as:

  • Presence in the Market of HFT, which stands for High-frequency trading

In some cases with discretionary trading and a lot of preparation you can leverage the HFT to your advantage.

  • Phenomenon of slippage. Slippage is the difference between the real price of a run and the price at which the trading system was the trigger signal. With intraday trading often it does not allow slippage to evaluate in a real one “equity line”.

For operations multiday our preference lies with Algorithmic Trading. Obviously, the trading system is programmed, so that the system uses rules to trade near our scheme of discretionary trading.

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