Understanding Discretionary Trading Systems
A discretionary trading system makes you an active participant in all phases of the trades you make and provides you with a great deal of leeway when making trading decisions. With this approach, evaluating the economic data, analyzing the broad‐market indexes, determining which sectors are showing strength, and identifying high‐relative‐strength stocks that are breaking out of long trading ranges and hoping to catch a new trend all are up to you.
You make decisions based on what you see in the charts and in the fundamental economic data, and you enter and exit (buy and sell) positions based on that information. When you’re relying on a discretionary trading system, your judgment is a key factor.
A discretionary system requires a great deal of discipline, which can cause problems for some traders. This type of system works well for traders who are capable of making good decisions quickly under pressure. But discretionary systems may prove troublesome if you allow your emotions to wreak havoc with your ability to think clearly, act rationally, and make thoughtful trading decisions.
- When emotions cloud your trading decisions, you may end up
- Prematurely liquidating your positions
- Holding positions too long
- Anticipating trading signals in attempts to get better entry and exit prices
Another problem with discretionary systems is that they’re difficult to test. This is possibly their greatest drawback. System testing is useful because it helps you understand situations in which an indicator works well and those in which it fails. With a discretionary system, you can test the indicators, but you can’t reliably test your discretion.