Probability trading: The best of both worlds?
The systematic trader
Though discretionary trading is the more common approach of self-directed traders, there is another option. Systematic trading is just as it sounds: Using a programmatic system to create entry and exit signals. The advantages for the trader are many:
- Minimizes emotion-driven mistakes
- Visibility of historical results promotes more realistic expectations regarding trade frequency, win rate, profit expectancy and drawdowns
- Eliminates the baby-sitting of trades
- Appeals to the mathematically and engineering-inclined
However, there are challenges and disadvantages, too:
- Difficult to create robust, profitable systems without extensive market experience
- Requires significant programming skills or expensive outsourcing of these efforts
- Difficult to program for the myriad of unique, real-world scenarios
- Over-optimized systems can set unrealistic expectations and under-perform expectations
- Can be difficult to follow and execute signals when market conditions become volatile
Further, discretionary decisions are not completely eliminated. Ultimately, there are many subjective decisions required to program an entire trading system, including: Selection criteria, entry timing and technique, exit criteria for targets as well as stops, position sizing, etc.
Most systematic traders will allow at least some minor discretion, such as not acting on a signal in front of a report or if volatility spikes. Discretionary traders will look at much of the same technical information as the systematic trader but will weigh all that information before making a decision on a trade, rather than creating rules that generate trade signals based on the information.