In order to answer these questions, we first need to know what makes these practices stand apart from each other. In this post, we will make an attempt to decode all the questions related to algorithmic trading vs discretionary trading. A discretionary trader has a set of rules that they tend to follow throughout their trading practice, these rules are modified or replaced based on their experience and what works best for them. Some follow these rules rigorously, while others tend to experiment till the time they feel they have cracked the code and continue to make required modifications in their strategy.
A discretionary trader studies the signals and charts, and then makes a decision on whether to buy or sell the asset. The trader calls the shots in discretionary trading i. In discretionary trading, maximum risk originates from decisions taken under the influence of uncontrolled emotions of the trader. In most cases, these emotions can lead to trades which cannot be logically defended. Systematic traders use algorithms to make trading related decisions or predict their best chance of making a profit out of the investments that they make.
The algorithms are changed based on the market conditions, the type of shares, markets etc. A systematic trader cannot stand the degree of uncertainty by relying on studying the charts manually and reading the signals.
Their role becomes that of a spectator who monitors the algorithms performance based on the logic that has been built and makes the required changes once the algo has dropped in performance or has stopped working. The trading strategy of discretionary traders is derived from the information gathered by learning charts, market conditions, understanding indicative signals and other relating factors which help them to draft a certain set of rules to follow before placing an order or deciding when to exit.
An algorithmic trader, on the other hand, finds it risky to depend merely on the findings gathered by examining charts. The decision of placing an order or making an exit depends on the algorithm s.
The algorithms are designed based on:. This is done by algo professionals with the required skill set. The system studies the market and makes decisions based on the logic set for the algorithms. Discretionary traders are prone to be influenced by emotional factors at the time of decision making.
Traders often tend to defend their emotional bias at the time of projecting the outcome which may lead to significant losses. The risk of getting influenced by factors related to emotions is almost nil in algo trading. The mathematical models are purely based on the set of instructions and eliminate the intervention of any kind of emotions be it greed, fear, false intuitions etc.
The practice of discretionary trading restricts the use of automated systems that call the shots for you. It is managed manually by the trader and the system has little or no say in what you want to do next. There is no need for an algorithmic trader to monitor markets and read charts, as trades are done automatically. The information fed into the system is processed by the black box and suggestions are made for the best possible outcome. Once the trader is convinced of the outcome they can switch the algos on and just screen the progress and make changes accordingly.
There are no pre-defined rules for a discretionary trader. The purchase or exit is made based on the experience and the study done by the trader which may result in multiple trading rules for each execution. The rules in algorithmic trading are pre-defined and backtested. The backtesting of historical data increases the probability of a successful outcome. The trades are placed at pre-defined levels which are governed by algorithms. An impulsive behaviour of a discretionary trader due to a sudden change in market conditions may result in a loss.
This may be due to the lack of understanding or failure to read the volatility of the market. Techniques like sentiment analysis help algos perform better in such scenarios and are able to read the fluctuations in markets based on external factors. A typical set of observations made by a discretionary trader on the price chart mentioned above can be listed as:. Technology is a part of evolution and us humans have generated technologies that will define this century.
Adapting to new and better means of trading is akin to moving to better results and one cannot run away from it. Your email address will not be published. This iframe contains the logic required to handle Ajax powered Gravity Forms.
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