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TRADING APPROACH: DISCRETIONARY vs. MECHANICAL

All Traders use Models

Novice – The trader works on his gut feeling. Reasons for trading are purely in his head.

1. Novice

Discretionary – Majority – The Trader marries gut driven discretion with explicit models.

2. discretionery

Mechanical – Some – Purely systematic approach that reduces the decision making process to an unequivocal set of rules that can be quantified and measured.

3. mechanical

Ingredients of A Professional Model

  • Consistent
  • Objective
  • Quantifiable
  • Testable
  • Scalable
  • Not subjected to human biases
  • Celebrates randomness instead of being fooled by it

Discretionary or Mechanical Trading ???

Both styles require well defined rules. Discretion is not open ended.

Successful discretionary trading is almost mechanical. The Trader can sometimes overrule his model. He must have good reasons to do so.

COMPARISON 

4. comparison

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