Discretionary Trading Rules

Published on: May 12, 2020

In this month’s group therapy session, we discussed discretionary trading rules. The recording of the event is below:

Most traders split trading into 2 categories – mechanical and discretionary. Mechanical trading is where most start out – looking for a ‘hard set’ of rules to follow, usually based on technical analysis with rules like “buy when indicator A crosses indicator B”. Mechanical systems also have the allure that they can be automated and that this automation saves you from your own psychological flaws.

The downside of mechanical trading as most traders find out – is that it doesn’t actually work for the individual trader. There are too many external, unconsidered factors outside of their rules for it to work.

Mechanical systems are often also called “Rules-based systems”. So many end up thinking that that discretionary trading must be trading without rules, that it’s just “trading instinctively”, “shooting from the hip”, “trading your gut feel”. Many traders do attempt to do exactly that, with disastrous results.

In this group session, we considered what rules-based discretionary trading really looks like. Where you start out and where you should end up.

– Pure instinctive trading, why it fails, where you will end up entering the market, why you will lose.
-Understanding the benefits of discretionary trading & leveraging them.
– Creating a safety net – protecting yourself from yourself.
– What a discretionary rule should look like.
– What your rules should cover. Factors to add to your trading & when to add them.
– How to ensure your trading improves over time.
The end game. What your trading should evolve into.

The last point is intended to give you an idea of what discretionary trading looks like for an advanced trader, where you are headed and how different your trading will look as you progress.