Are You Discretionary or Mechanical Trader?

Traders often classify themselves as stock traders, or e-mini traders, or ETF traders, or Forex traders. However, at a more basic level there are really just TWO types of traders – discretionary and mechanical.

The discretionary trader uses his or her experience and judgment to make trading decisions. The discretionary trader will usually have a documented trading plan with rules to guide or bound their trading decisions. But when it comes time to actually pull the trigger on an entry or an exit to a trade, they will evaluate the current market situation and apply the intuition they’ve developed over years of experience.

Conversely, systematic or mechanical traders have a rigid set of rules that precisely dictate their entry point, when they will exit the trade, and the size of the position. Systematic traders do not take into account anything in the market environment that is not explicitly covered in their rules. They take every trade. Period. Intuition, judgment, and experience do not enter into the equation. Systematic traders will also have a documented trading plan, but their rules will be so specific that they can be, and usually have been, programmed and back-tested. (Back-testing is the process of modeling a trading concept in a computer program and testing to see how it performed in past market environments).

I developed trading plan, create a set of rigid trading rules, combine a few technical indicators for my entry and exit strategy. So, yes, I am a mechanical trader. Not being biased, but my arguments are here.

#1. Systematic trading may not be as fun, but it’s much more consistent

#2. Emotion is a demon to trading 

I am not saying that discretionary trading is not as good as mechanical trading, but I was not in luck when I was one. I started my trading days as a discretionary trader, enjoying my time deciding - to buy and sell. However, even though it was exciting, the return was not as good as expected and hence I switched to mechanical trading. I developed codes to give me buy/sell signal and keep testing and updating my codes. In this way, I need to be really disciplined and try not to be affected by emotion.

So which method is best? Which method should you choose? The answer is, of course, that it depends. Discretionary trading has the advantage of tapping the world’s best computer – your brain. But the downside is that the computer supported by our necks is very susceptible to the virus of emotion. Whether you’ve been trading 1 week or multiple decades, emotion is a demon that must always be neutralized.

So what are you?

Types of Traders - Overview

The scalper is an individual who makes dozens or hundreds of trades per day, trying to "scalp" a small profit from each trade by exploiting the bid-ask spread.

Momentum traders look for stocks moving significantly in one direction on high volume and try to jump on board to ride the momentum train to a desired profit. For example, Netflix (Nasdaq:NFLX) surged over 260% to $330 from January to October in 2013, which was way above its valuation. Its P/E ratio was above 400, while its competitors' were below 20. The price went up so high primarily because many momentum traders were trying to profit from the uptrend, which drove the price even higher. Even Reed Hasting, CEO of Netflix, admitted that Netflix is a momentum stock during a conference call in October 2013.

Technical traders are obsessed with charts and graphs, watching lines on stock or index graphs for signs of convergence or divergence that might indicate buy or sell signals.

Fundamentalists trade companies based on fundamental analysis, which examines corporate events such as actual or anticipated earnings reports, stock splits, reorganizations or acquisitions.

Swing traders are really fundamental traders who hold their positions longer than a single day. Most fundamentalists are actually swing traders, since changes in corporate fundamentals generally require several days or even weeks to produce a price movement sufficient enough for the trader to claim a reasonable profit.

Novice traders might experiment with each of these techniques, but they should ultimately settle on a single niche, matching their investing knowledge and experience with a style to which they feel they can devote further research, education and practice.

Source: http://www.investopedia.com/articles/trading/02/090302.asp