Forex Trading Mechanical And Discretionary Systems
In addition to being divided into technical and fundamental analysis, the trading system can also be divided into mechanical and discretionary trading.
If you are trading using software that can automatically entry and exit, or use robot software, then your trading system is called mechanical . Similarly, if you apply a variety of technical indicators, or a combination of indicators and price action that generate trading signals. Conversely if you rely on the feeling or intuition for entry or exit, means you are trading with discretionary system. Trading with discretionary systems is based more on experience and less relies on technical indicators. Trading based on fundamental news can be said to be discretionary . Which of the two trading systems is more profitable?
Mechanical trading system
The advantages of the mechanical trading system are:
- Can be done backtest against the trading system, both complex and already programmed in the form of software so as well as simple. From the backtest results can be known the probability of profit and loss, or profit expectations .
- You do not have to worry about complicated analysis. The trading signal on your system will promptly notify you when to enter or exit, complete with stop loss and target levels depending on the parameter setting / risk reward ratio .
- The mechanical trading system does not involve your emotions during trading.
- If busy with other jobs you do not have to monitor market frequently, just set the software parameters or indicators, and leave the market. Your system will work by itself.
Lack of mechanical trading system:
- The resulting backtest results will not always be accurate for current market conditions. The market is always changing with random components. The pattern of market price movements can be similar, but not exactly the same. Profit expectation is a probability and uncertain. A trading software or a mechanical system that previously worked well may not be profitable when applied to current market conditions.
Discretionary trading system
Advantages of discretionary trading systems:
- It’s easy to adapt to the current market situation. If you are familiar with the various price movements and trends, then you will be able to perform instant analysis, and can easily adjust the situation without having to bother looking for the most suitable indicator.
- Because it is supported by experience, you will be psychologically satisfied with the decision you take, regardless of the outcome you will get.
- You can learn from time to time while adding to your experience and insights in trading, such as which trading signal is the highest probability and so on.
Disadvantages of discretionary trading systems:
- It takes a long time to learn and build experience to know the market conditions instantly and accurately.
- For beginner traders this trading system can be dangerous. If their knowledge is still minimal, it will lead to gambling.
Which system is more profitable, depending on your personality and character. If you are still often afraid, greedy or emotional, then you should use a mechanical system. Conversely, if you can control the emotions, and your experience is adequate of course you will be more confident with the discretionary trading system. Whatever the trading system, you must be disciplined and have a clear trading plan.