Systematic Trading is Better than Discretionary Trading

The approach to trading with predefined rules is important in the long run to make trading decisions. It enables you to analyse the trades and improves your performance. There are two main approaches to trade in stock markets - the discretionary trading approach based on current market conditions and the systematic trading approach based on algorithms.

Systematic trading is based on algorithms to search and execute trades. Trade takes place with limited intervention of the trader. It is mainly based on technical analysis of market facts. A trader having the patience to test different algorithms is on his way to becoming a successful systematic trader.

The discretionary approach is also based on data and rules but a trader takes the final decision on a trade. Quick traders who are experienced and fast in analyzing the available technical data implications and using their intelligence and intuition may become successful discretionary traders. This style of trading shows the power of the human mind but it leads to emotional biases also.

Factors that affect the Trading Approach Decision

1. Greed and Fear: Traders must stick to their predetermined strategies to eliminate volatility in trading. Trading should be free from emotions. Systematic trading works with algorithmic software where emotions of “gut-feel”, “greed” and “fear” are eliminated. But a discretionary trader might not be able to trick the emotions while deciding on trade.

2. Backtesting: Discretionary traders take quick decisions with their understanding and gut feel. They don’t have the option of backtesting a strategy that may cause heavy losses. The systematic trader follows backtested trading strategies that lowers the risk of losses.

3. Large fund to maximize profits: Investing is always risky. Large investments bring huge profit but they may bring huge losses too in the absence of tried and tested strategy and loss-stop strategies. One cannot invest large funds with uncertainty. It is better to follow a systematic trading approach than the most probabilistic scenario-based on thinking.

4. Easy to Compound: If we can understand the rule-set of systematic trading and follow the strategy, then obviously we will have leveraged trade with compound return potential. A strategy can compound returns with the option leverage.Compounding can be a powerful tool for building wealth when asset prices rise.

Summing Up

We found that systematic trading is better than discretionary trading. Systematic traders work with set limits of gains and losses under various scenarios of market movements. Thus, any losing streaks in any strategy is an affordable loss. Systematic trading approach is better to adopt as you cannot bet your hard-earned money with intuitions. Tried and Tested plans are always better to reduce the risk of losses.