Discretionary and Mechanical System

There are two kinds of systems for trading in Forex namely; discretionary and mechanical systems. The signals for trading that result from the mechanical systems are mostly based on technical analysis which is used in a methodical way. The discretionary systems utilize experience, judgment or intuition on the exits and entries.

But which of the two systems can provide the best results?

Mechanical systems

The Advantages This is the type of system that can be back tested and automated efficiently. The rules are not flexible/rigid. It is only a choice of having a trade or not. The traders of the mechanical systems are not so much vulnerable to feelings and emotions unlike the traders of the discretionary systems.

Disadvantages

Most of the traders do a back testing to check the system being used. To come up with the most accurate data one needs to tick the initial data first. The FX market constantly changes. The Foreign exchange market and all the other types of markets all have a component that differentiates them from the rest. The conditions that exist in the market may appear the same every time they happen but these conditions are really different from the previous events. A trading system that has performed well the previous year does not imply that it will perform the same the following year.

Discretionary systems

Advantages

This system can easily adapt the latest market situations. The decisions for trading are made out of experiences. The traders of this system Traders need to train to look at which signals for trading have a higher chance for success.

Disadvantages

The discretionary system cannot be automated and back tested because a decision has to be done always. It usually take plenty of time to develop the necessary experience to successfully trade and to be able to track trading in this type of system. In the beginning using discretionary system can be risky.

A trader should choose the system that suits his personality. For example, if he is a trader that has a difficulty in following your own signals for trading, then you should use the mechanical system where making decisions will not be so important in the system. A trader only has to get the trades that the system gives a signal to.

When fear , anger and greed which are barriers psychologically makes for undesirable trading scenarios then a trader should better use the mechanical systems, since one only has to follow what the system is telling you and no other judgment need to be done. The discretionary system is used by a trader who is disciplined in trading. The discretionary systems adjust to the market situation and a trader can alter the trading situation as a change in the market happens.

It does not however mean that trading in the discretionary system follows no rules. It only means that in this system the traders should learn to have his own setup because the trader makes a decision on what he will do.

Choosing a system is entirely up to the trader but there are some matters that they need to take into consideration like the following:

1.A trader has to be sure that the system matches his or her personality. 2.A trader needs to develop rules and needs to have discipline in following them. 3.Take time in creating the system. It needs time. 4.Try the system on a small account or a demo account.

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