Discretionary Trading Definition - XAUBOT

Discretionary Trading Definition

Discretionary Trading Definition

The life of a trader is all about decisions. So if you have also decided to become a trader if you want to take your trading to the next level, now is the time for more decision making.

The decision we want to talk about in this article has to do with becoming a discretionary trader or not. In fact, discretionary trading is the other side of the major trading type coin that holds the two types of discretionary trading and system trading.

Although, the main aim of this article is to discuss discretionary trading, we also want to compare it with its close counterpart, i.e. system trading.

Before we begin, please keep in mind that both discretionary and system trading are large scale and big picture approaches toward trading. They both entail a nearly unlimited list of tools, techniques, and strategies.


What Is Discretionary Trading?

Discretionary trading is a type of trading in which the trader will make all the decisions whilst trading with regard to what is taking place at the moment. So as a trader, with this type of trading you will have a much higher degree of control over your asset and the entire trading process.

Discretionary traders do not tend to depend on prefabricated and predetermined rules to guide their trades. Rather, they like things to be more spontaneous and impulsive. As a result, these traders must have an excellent command on the market and be equipped with a great arsenal of knowledge. It is only their intuition that they have with them.

Though, keep in mind that it doesn’t mean discretionary trading involves making completely impulsive decisions without any base and relying upon any bedrock of knowledge and experience. Quite the contrary, in fact.

Discretionary traders will have all the rules and guidelines of trading available at their call. But they will use those at their own discretion.

Ultimately, they are the ones making all the decisions.

This overall approach to trading is especially beneficial for situations where traders need to make quick decisions right then and there. They do not have the time to go and consult a bunch of guidelines or instructions as to how to react to the conditions they have in front of them.

And if you have spent any time in any financial market, you will definitely know what it means not to be accorded the time to make a lengthier decision. Sometimes, a moment is all you have.

This is especially true in the forex market. Even the smallest changes can wreak havoc in the bid ask spread and that is your opportunity to move in, or move out for that matter.

But it takes a seriously experienced and seasoned hand to execute this approach of trading. Let that be a segue to the next section, which is the upsides and downsides of discretionary trading.


Advantages and Disadvantages of Discretionary Trading

Advantages and Disadvantages of Discretionary Trading

Advantages and Disadvantages of Discretionary Trading

To recap, we learned that in discretionary trading the trader has full autonomy to execute the trade how they want. They make the decision themselves almost only based on the data available in the market at that current moment. However, they might also employ a detailed trading plan. But how they follow this trading plan will be fully at their discretion.

As a result, the most important upside of discretionary trading is that it can be useful almost anytime. Because you see all trading plans and trading approaches might hit a certain limitation when market conditions change drastically. But with discretionary trading that will never happen. No matter what happens in the market, the trader can rely upon his or her discretion.

On the other hand, the downside of discretionary trading is exactly its most prominent nature – i.e. it leaves everything to the discretion of the trader.

This means a trader who wants to pick this type of trading needs to be incredibly knowledgeable and skillful. If there is room for any doubt, then it means the trader will have a bias while making the decision. And it goes without saying, if you cannot make good decisions under pressure and very quickly, then discretionary trading will not result in profits for you.


What Is System Trading?

The Other side of this trading approach is system trading. So what is system trading?

In system trading, traders will not depend upon their own personal discretion. Rather, they depend on a detailed system or plan for trading that will tell them when to trade and when not to.

In system trading, the decisions are left to the process or system to make. Whatever the conditions of the market at the time, they will either match with the criteria defined in the system or they will not.

Naturally, if they fit the requirements of the system, then the decision is a “go.” And if they do not match with each other, then it’s a “no go.”

System trading leaves no room for doubt on the part of the trader. If conditions are met, then the trade will take place. There are obvious advantages and disadvantages that come with that type of approach to trading.


Advantages and Disadvantages of System Trading

Advantages and Disadvantages of System Trading

Advantages and Disadvantages of System Trading

The most significant upside of system trading is that it relies upon a system or plan of trading to execute trades. As such, the trader is relieved of many decisions making duties. The upside here is that the personal and mental biases of the trader cannot impact the trade in a negative manner.

On the flip side, system trading lacks a feature that we saw with discretionary trading. And that is adaptability.

System trading is not very adaptable to different market conditions. Only the requirements and criteria of the system matter. And such rules do not exhibit flexibility like a discretionary approach of trading.


Which One Should You Pick?

All the various trading approaches, trading types, and the numerous trading strategies have one aim and one aim only. And that is to bring you profits. None of them are designed to result in losses. Now they might result in losses from time to time or more often. But that should be laid at the feet of the trader or unexpected market conditions.

With that in mind, you need to know that no trading approach has supremacy over another. There are certain major factors to consider before picking one over the other. These main factors include your available equity, your risk tolerance, your knowledge and skills of trading, and the amount of time you want to dedicate your trading, among others.



Discretionary trading is among the twofold major approaches to trading in financial markets that includes discretionary trading and system trading. In this dichotomy, discretionary trading refers to an approach in which the trader makes all the trading decisions based on his or her discretion alone without having to consult with a trading plan first. On the other hand, system trading is an approach that entails trading based on a system of trading or a certain set of rules.

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