Comparing Systematic and Discretionary Trading

In the trading world, traders use diversified strategies and methodologies to achieve their financial objectives. Two of the most prevalent approaches are systematic trading and discretionary trading. But what do these terms mean, and what are their key differences? This blog post will dissect these two trading styles to comprehensively understand their characteristics, decision-making processes, and techniques. We’ll also discuss real-life examples of successful traders and determine which method may suit individual traders.

Defining Systematic and Discretionary Trading

Systematic Trading

Systematic trading is an approach that leverages predetermined rules and algorithms to make trading decisions, manage risk, and execute orders. This method is also known as quantitative or rules-based trading. It focuses on establishing a consistent and disciplined approach using quantitative models that eliminate emotional biases and subjectivity from the process.

Pros:

• Consistency and discipline in the decision-making process
• Elimination of emotional biases
• Ability to process and analyze vast amounts of data

Cons:

• Reliance on historical data and performance, which may not always predict future results
• Limited flexibility and adaptability to changing market conditions

Discretionary Trading

On the other hand, discretionary trading is a methodology that allows traders to make decisions based on their judgment, experience, and intuition. This approach does not strictly adhere to predetermined rules or algorithms. Instead, the trader can evaluate the market situation and adjust their strategy accordingly.

Pros:

• Flexibility to adapt to changing market conditions
• Ability to capitalize on unique opportunities and market inefficiencies

Cons:

• Susceptibility to emotional biases and decision-making inconsistencies
• Reliance on individual judgment and expertise

The Different Approaches in Systematic and Discretionary Trading

Decision-Making Processes

The primary difference between systematic and discretionary trading lies in the decision-making process. Systematic trading relies on predetermined rules and algorithms to make and execute trade decisions. On the other hand, discretionary trading hinges on the trader’s judgment, experience, and adaptability.

Techniques Utilized

Systematic traders often use advanced statistical and mathematical models and computer programming to create and implement their trading strategies. In addition, they may employ machine learning, neural networks, and artificial intelligence to enhance their models. In contrast, discretionary traders use technical analysis, fundamental analysis, or a combination of both to make decisions based on their understanding of the market.

Real-life Examples of Successful Traders

Legendary traders like Jim Simons, founder of Renaissance Technologies, and Cliff Asness, founder of AQR Capital Management, are known for their success in systematic trading. They’ve utilized structured data analysis and mathematical models to create innovative trading strategies.

Meanwhile, successful discretionary traders such as George Soros, founder of Soros Fund Management, and Paul Tudor Jones of Tudor Investment Corporation have exhibited great intuition, flexibility, and adaptability, enabling them to seize unique opportunities in the market.

Which Trading Style is Best for Traders?

It comes down to the individual trader’s goals and style. For example, systematic trading may suit traders with a specific plan of attack, who prefer to follow predetermined rules and are comfortable with leveraging technology in the trading process. On the other hand, discretionary trading may be more suitable for traders with informal plans of action who rely on their experience and intuition to make trade decisions and can stay flexible and adaptable to changing market conditions. Ultimately, it’s up to the trader to decide which method best suits their needs and goals.