Smita Parekh 16th Oct, 2019
Reading minds of traders through price chart is a skill. Discretionary trading is also a decision based trading where the trader decides which trades to make, based upon the information available at that particular time on the charts. There are many traders who fall in this category, which is exactly opposite to mechanical trading where there is no room for discretion. E.g. A discretionary trader will put his buy order only if he sees a sharp fall in price after a big rally and the fall is on one of the Fibonacci ratio confirmed by a candlestick pattern, he may cancel the trade if the fall is not as anticipated (discretion).These traders analyse the market structure, look out for patterns that price is forming, workout their entry/exit rules and define the risk to reward ratio the trade is offering, if the risk reward is not favorable they pass on the trade as they focus only on high probability set up with a better risk to reward ratio. The advantage with such analysis is that it is adaptive to different market conditions e.g. if a market is range bound discretionary trader will adjust his entry/exit criteria accordingly which is not the case in mechanical trading, on the other hand too much of discretion can paralyze a trader to actually put on a trade that can create confusion which is not the case in mechanical trading where entry and exit criteria’s are very simple and clearly defined. Discretionary traders are very good at analyzing different market cycles and forecast the future price movement which gives them an edge to act as per the current situation, markets can be up trending, down trending, range-bound, highly volatile all these market natures are spotted by the artistic approach a discretionary trader possess however, they 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.
Trading style goes with personality a trader carries, discretionary trading is suitable for the people who need control in their decision making and not just randomly rely on a system. Artistic personality can adopt this style as pattern analysis, market structure and cycle definition is more of an artistic approach. Discretionary personalities are not relied on computer programmes or algorithms to make their decision which gives them the freedom to add discretion. Recognizing a trading style based on one’s personality is a must, be it discretionary or mechanical both have equal potential to be profitable.