subject: Finally Get The Truth About Mechanical And Discretionary Trading That Many Will Hate Being Revealed [print this page] There are many mechanical trading systems available today but should you invest in one to help you trade and in what circumstances is the alternative of discretionary trading better or worse? Let's consider the facts.
Mechanical trading essentially means trading based on rigid rules programmed into a system without any interpretation or discretion used by the trader when it comes to actually trading. So it's easier, right?
A supposed benefit of mechanical trading is that it aims to take some of the emotion and subjectivity out of making your trading decisions but sitting on a winning or losing trade still effects traders, mechanical trading or not.
Also mechanical systems are only as good as their rules which may be flawed in trading ranges and work excellently in trending markets or vice versa.
In my opinion it's a big advantage to know what rules the mechanical trading system is based on before you use it so as to help curb as much second guessing of the system which is always inevitable to a certain extent, even with mechanical trading.
A big plus with mechanical systems is that they can easily be back tested with past data whereas this is obviously not really possible with discretionary trading without being biased and having an optimistic slant as to what trading decisions you would have made.
The big benefit with discretionary trading is that you can be more agile and detect when market conditions have changed but it requires more skill than using a mechanical system that someone else created.
Discretionary trading also allows more knowledge of a market's personality to be understood and acted on than a mechanical system generally can.
A downside is that overall you'll need more discipline when trading based on your discretion than under a mechanical system.
Also you need a clearer head when you have an active discretionary trade so you can analyse your position as opposed to if you're using a mechanical system which will just tell you when to exit or add to your position size.
So overall it's arguably not always a bad idea to invest in a mechanical trading system but it's vital that you back test it, in other words apply it to past data in different market conditions; both trending and trading ranges.
However a mechanical trading system is only as good as its rules which will probably not work in all market conditions, so it's well worth becoming a better trader by learning more technical analysis patterns and trading methods that work and becoming a discretionary trader.
