When you start your journey in trading, the amount of information you’d be exposed to is enormous and often overwhelming. Many ideas seem conflicting, such as those related to a trading approach: some insist on having a rigid set of rules, while others promote flexibility.

The truth is there is no right or wrong way to trade (unless you take excessive risks); there is a way that suits you, making your mind work at its best.

Here we will look at the roots of many distinctions – the traders’ types, and dive deeper into the specific kind, discretionary.

Types of traders

Let’s recall the main trading approaches. All traders group into mechanical, discretional, and hybrid.

Mechanical traders follow a set of rules that are set in stone, not allowing any deviation regardless of the short-term changes in the market environment. The strictly defined rules enable traders to create an algorithm that would execute the trading strategy automatically. 

Mechanical trading benefits from the ease with which we can generate the statistical data of the strategy’s performance, thus finding out the approximate profitability of the system. 

The drawback, though, is rigidity concerning the market state – the trading robot may start consistently losing money if it still operates under the rules designed for the trend market while the environment turns sideways.

Discretional traders also use rules. However, specific rules are often readjusted, depending on the current market conditions. Flexibility is one of the main strengths of this group of traders. After traders accumulate enough trading experience and learn critical mental skills, they usually unlock the ultimate edge of discretional trading – the gut instinct.

The constant struggle of non-mechanical traders is overcoming human nature: biases, internal conflicts, and various destructive emotions that get in the way of profitable trading.

Hybrid traders are a mix of two camps, using algorithms for certain parts of their strategy. For example, a trader may use custom-made scanners that offer a possible trading opportunity if certain conditions are met. Still, it would be up to a trader’s discretion whether to use the signal. 

This type of trader may reap the benefits of two camps: their trading system would have a clear statistical backing, yet traders would still be ready to evolve along with the market conditions. 

Who should be a discretional trader?

From Jesse Livermore to George Soros and Paul Tudor Jones, some of the most prominent traders are discretionary. However, just because the approach worked for some people (even highly successful) doesn’t mean you should blindly imitate someone’s path.

Traders who pursue a discretionary path tend to want to have control over the process – whether it’s their life or career. They are usually self-driven, independent thinkers. In trading, the traits manifest in taking charge of each position individually: deciding on entry, stop loss, profit target, and interim trade management. 

Such a tendency to act according to one’s judgment may be due to the deep belief that there aren’t two identical sets of circumstances in the markets; therefore, adjustments are needed now and then. 

Discretional traders often have liberal arts backgrounds. If we think about music, those that are good at it naturally seek, recognize and recreate patterns – a vital skill in trading. Consider the repetitiveness of musical notes and price charts.

The learning curve: what to expect

If you found yourself matching the discretionary trader description, it would be helpful to have a rough image of a learning path pertaining to this camp. Below are the stages you can expect to go through on the way to mastery.

1.Collecting information: Here, a trader learns as much theory as possible and tries out different methods. Often there could be some decent short-term gains, as the trader hasn’t faced the cold realities of trading yet (random distribution of the results, probabilities, etc.), thus doesn’t have much of a fear that blurs the judgment. For the same reason, brutal losses and account blow-ups are also common.

2. Specialization: After getting some feet in the game, a trader begins to notice what works and what doesn’t and the way to trade that feels more natural to them. 

3. Adequate preparation: As the trader figures out what method they want to pursue, they recognize the need to take trading as a business. A trader develops a detailed plan and formalizes it as much as possible. 

The trading plans of discretional traders usually contain many rules in the form of guidelines – for example, “if the market is overextended, consider not buying.” The trading plan is backed by rigorous manual backtesting, giving a trader the confidence to pull a trigger in a live market. 

If a trader follows the plan well and employs adequate risk management, the results become consistent, although not far from breakeven.

4. Optimization and psychology evolution: The experience teaches traders that no system works efficiently in all market conditions. Slowly, a trader starts to adjust the trading system now and then that is confirmed first by conviction and intuition and the historical data afterward. 

At the same time, the realization comes that the mental state immensely affects the judgment quality, so a trader develops specific tactics to manage their mental state. The tactics create the set of habits that keep the trader’s psychology stable, forming a foundation for consistent execution to the best of the trader’s ability.

5. Organic learning and exponential growth: The trader has reached remarkable self-awareness and proficiency in the trading method at this stage. As there are minimum self-limiting beliefs, the learning accelerates, bringing consistent profits and maximizing the potential of the primary trading strategy.

The stages may overlap or take different forms or sequences. It’s helpful to take it slow, recognize what stage you’re currently at and what’s ahead, and just enjoy the process with no confusion!

Conclusion

Discretionary traders are distinct in their natural tendencies, methods, and overall philosophy from systematic traders. The refining process in trading involves specific stages that every discretionary trader goes through in one way or another.

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