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Discretionary Trading vs. Robots

I have been trading for more than 15 years now.

When I first started, in 1994 as far as I remember, there wasn't a lot of software on the market and of course we didn't talk about Forex yet.

But, "magic systems" were already spreading over the web. You were finding different kind of gurus selling their black box that only professionals use, of course, promising you a fortune in a matter of days or even hours...

One after the other, the gurus disappear leaving place to others.

Today, you can find thousand of "wonderful" systems if you type "trading system" on any search engine. You may read numerous articles promoting the success of such expert advisor or trading robot.

Speaking of robots, it's amazing how people believe in automatic trading. They think they can go to work in the morning, leaving behind them this wonderful robot catching pips on the Forex market all alone. Have you been given the chance to get this ultimate trading system only used by banks or institutionals? Just be patient, a smart guy will soon propose a good one, maybe the best.

I use an ironic tone on purpose because I am tired to see all this disillusion from people who still believe in Santa Claus. Get back on earth, my friends, there is no easy way to earn money on the financial markets. Most of the traders, living from their activities, won't share their work with you.

The good news is you can learn to trade by yourself. Today, you can get very good trading courses on the web, free or not. You have access to valuable resources if you take the time to select websites.

Now, what are we supposed to do with all these training and advice, you might ask?

Well, if you want to be successful in trading, whatever the market, you will have to learn to become a trader. You will have to develop your system, or trading approach, and adopt a good attitude through a back-tested money management (the one you feel comfortable with and which works).

So, as a summary:

  • Learning the trading basics from books or online resources (technical analysis, fundamental analysis, etc.)
  • Develop your own trading system which could be as easy as efficient.
  • Use a money management system which is a necessary condition to make your trading system profitable.
  • Learn how to behave properly while trading. (Have you heard of the emotions control?)

When I use the word "system", I don't make reference to any automatic trading or robot. Besides the fact I can't stand automatic systems, it has been proven that systematic trading doesn't work on the long term.

Why is that? We know that patterns always repeat themselves cycle after cycle so we could imagine a easy way to benefit from this repetition. The answer relies in the human being behavior on the market. Traders are filled with emotions like greed or fear. Even if most traders now recognize the usual patterns and knows how to follow a trends, most of the time they let themselves overwhelmed by emotions when the market doesn't react like it should...

That leads this question: Why discretionary trading works?

Discretionary approach consists in following a trading system (because you always need some king of system) through the human eye. A trader, controlling his emotions and analyzing the market with objectivity, has the ability to understand the market crowd represented by all the traders. He will be able to understand the excesses and adjust his trading accordingly.

A robot will enter a position as soon as a resistance or support is broken or when a 38% Fibonacci retracement has been reached etc. Of course a trader would initially adjust his robot parameters according to his strategy but he won't be able to "play" new market conditions for example.

The market likes to defeat all automatic systems which tend to setup logical stop losses and profit targets. Have you ever seen the wonderful spikes on the Forex market, in particular after news releases...

A discretionary approach will never prevent you from losses. Any trader will suffer from losses. It is part of the activity. If you don't want to loose, you should try no-risk investments offering 2-3% a year.

But at least you will always control what you are doing, knowing exactly what the market is leading and if this is a good moment to enter a position or not.

You have obviously a set of rules, explaining the when and how you enter a position, but you may adjust your strategy according to certain market conditions.

Be careful though. You need to stick to the plan you implemented when developing your trading system and money management. It's a very important aspect of the trading. But once again, there is no automatic entry position. For the exits, it's a bit different because you can set a profit target in advance and exit the position automatically. You develop this aspect in your money management rules.

I hope I gave you the desire to become a real trader using a discretionary approach, far from automatic systems which definitely don't work. Trading can be fascinating if you give yourself the means to do it properly.

by Sebastien Duval