System Vs Discretionary Trading: Which one is Better?

When it comes to profitable trading, there are two main approaches that traders can take: system trading and discretionary trading. While both have their advantages and disadvantages, the choice ultimately depends on personal preference and individual goals.

System Trading

System trading is a rule-based approach where trades are executed based on predefined criteria. This means that traders follow a set of rules for entry and exit points, risk management, position sizing, and other factors. System traders rely heavily on quantitative measures such as indicators to identify opportunities in the market.

The biggest advantage of system trading is discipline. Since trades are executed based on objective rules rather than emotions or intuition, system traders can avoid making impulsive decisions that could lead to losses. Additionally, backtesting historical data can help refine strategies over time to increase profitability.

However, one downside of system trading is its inflexibility. Markets are constantly changing and evolving which may render certain strategies ineffective. Traders must be willing to adapt their systems accordingly with changing market dynamics. However, it can also be taken care of (to some extent) by increasing the period of backtesting.

Discretionary Trading

Discretionary trading involves making subjective decisions about when to enter or exit trades based on a trader's experience and intuition. Discretionary traders use fundamental/technical analysis to make informed decisions about market trends and the future trajectory of the security under consideration.

One advantage of discretionary trading is flexibility - traders have more freedom in decision-making since they aren't bound by strict rules like system traders. Additionally, discretionary traders may be able to spot unique opportunities that wouldn't fit within a specific set of rules.

However, this approach also has some downsides such as emotional bias which can cloud judgment leading to poor decision-making and resulting in losses due to psychological factors like fear or greed influencing trade outcomes.

Which Approach Is Better?

Ultimately there isn't one correct answer since it depends largely upon an individual’s personality type & preferences regarding how much control they want over their investments vs letting an algorithm or some quantitative rules do all the work for them; however, both approaches can be profitable if executed correctly. System trading is ideal for those who prefer discipline and objectivity while discretionary trading may appeal to those who enjoy the freedom of making subjective decisions based on their experience and intuition.

In conclusion, system trading vs discretionary trading is a personal choice that depends on individual preferences and goals. While system traders benefit from objective rules and backtesting, discretionary traders have more flexibility in decision-making but must manage emotional bias effectively.

In my personal opinion, most discretionary traders lose money as compared to systematic traders as they aren’t able to handle emotional swings, fall victim to analysis paralysis, and have less idea about their position sizing, all of which contribute toward a higher probability of losses.

Read More on Nifty 50: Portfolio: 3 Nifty 50 Stocks with 'Highest' FIIs' Interest!