Trading Strategies-Rule Based & Discretionary

June 18, 2019

 

 

Rule Based Trading

Traders who follow a rule-based approach have usually a fixed set of rules or trading plans that signal them when they have to enter a trade. Especially traders who rely on indicators are often rule-based, indicator strategies usually require certain values, developments or standings on their indicators before an entry signal exists.

Automated trading strategies are always purely rule-based since conventional algorithms cannot think for themselves and, therefore, need exact parameters that signal them when they have to enter a trade.

PROS:

Rules can eliminate the impacts emotions and psychology often have. If you have fixed parameters for entering trades, your trading style is less subjective and easy to replicate.

CONS:

Purely rule-based strategies often have a hard time adapting to changing market conditions and while such strategies perform well under certain conditions, they fail completely when market conditions change.

Discretionary Trading

The discretionary trading system adapts to changing market conditions. Such methods require a high level of personal analysis and depend heavily on continuous research. Entry signals and how trades execute their trades changes continuously since markets always change.

PROS:

Discretionary strategies can adapt to changing market conditions and traders can react faster when markets suddenly change.

CONS:

Discretionary traders often use their approach as an excuse to be less strict about the way they approach trading.

The absence of strict rules does not mean that a trader is purely trading based on assumptions or gut feeling, but that he has to assess current market conditions and adapt to his style.

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