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Automated Vs Discretionary Vs System Trading
In the world of trading, there are two main schools of thought- programmed/automated and discretionary methods of trading.
Discretionary
trading is when one is making decisions on what to do real time based
on market activity. Automated trading removes the human decision making
element out of the process and does pre-programmed responses based on
market activity.
For
computer automated trading - ideally the biggest pro would be that
you'd be able to turn it on and just sit back and let the cash roll in
while it does its thing. No thinking required- just a simple flip of the
switch to make money. No faulty human interaction to mess things up...
It's the Holy Grail that every trader has thought about at some point and would love to have- who wouldn't?
On
the opposite end, you have discretionary trading, where people decide
whether to buy or sell based on what they see going on in the market.
This is what the majority of non professional retail traders do.
The
region of space both types can share is systematic trading - where you
trade according to a defined set of trading rules and methods. The
automatic traders will have these rules programmed in while the
discretionary trader manually operates his system. My trading style
falls into the category of discretionary system trader.
Which
method is better? People working on automated systems swear by them and
condemn discretionary traders as giving their money away to the market.
Discretionary traders scoff at automated traders as trying to perform
an impossible task resulting in a big waste of time and money.
In
the professional world of Wall Street, automated trading machines exist
but they only look to make pennies per trade- the key for them is
performing thousands of transactions per second so they can make big
profits on mass volume. You need big bucks to have such a machine and a
big outlay of capital to be able to afford to trade on such a large
scale. In other words, this is not available to non professional private
traders like myself that trade on a far smaller scale.
On
the smaller scale, an automated system would have to place fewer
trades that would last longer. To date, while I have "heard" of
automated systems that are successful for the retail trader, I have yet
to see a bonafide proven system that one would say is successful if your
goal is to keep risk low and live off the income.
The
Kryptonite of discretionary traders are their emotions. The market is
geared to induce an emotional response that will lead you to doing the
opposite of the right things to do. One of the first things a competent
trader has to master is the control of their emotions and ego- it's the
cause for most discretionary trading losses.
Purely
discretionary traders treat the market like an extension of a Vegas
casino and make "bets" based on gut feelings. As you move towards more
organization and control, you have "system" traders who have a defined
method/strategy of making trades, but it's not automated and instead
done manually.
This is the biggest "pro" of automated trading - removing the human chaotic human emotional factor from the equation.
However,
as a discretionary system trader, my answer may be biased, but I think
"organized/system" discretionary trading is superior to automated
trading for the following reasons:
1)
The market is comprised of living/thinking traders, which makes the
market a living entity of sorts composed of the summation of human
actions. Trying to code that type of random behavior analysis into a
working program is incredibly challenging and perhaps beyond the scope
of the technology that currently exists for it to perform consistently
well for retail traders.
2) It's said that the market never repeats but often rhymes- making it difficult to program in those subtle variances.
3) The learned response: being able to learn/adapt from past mistakes favors discretionary over automated trading.
From
the above, I think #3 is the biggest reason against automated system
trading. When market conditions cause a trader to lose money, they know
they need to make changes to their methods. A discretionary system
trader likely has a better feel for the market than an automated trader
who just plugs in market variables. As a result, the discretionary
trader will have a better chance at pinpointing the exact problems while
the automated trader only knows the current running programs need
changing, but no specifics on which variables or rules to change.
Running
automating trades comes at the price of not having a hands-on feel of
the market, so detailed knowledge of market behavior and nuance is not
as developed as those with their hands continually on the driving wheel
such as discretionary traders are.
I
can point to my own trading growth from being able to do analysis on my
trading logic and figure out what improvements to make to adjust for
the market.
3 comments:
People are more preferring automated trading infact they are getting in return too but this will not last for a long and thus I use forex tips which are manually researched by persons.
I believe on analysis done by researchers as KLSE stock analysis done by broker gives me quite good results.
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