The Difference between a Mechanical and a Discretionary Forex Trading System
In foreign exchange, trading systems are used to determine whether a currency pair is most profitable at a given time. It’s a method based on a series of signals derived from analysis charting tools or pertinent news-based events. Depending on the technique used to derive the trade signals, forex trading systems could be either mechanical or discretionary.
Is a mechanical forex trading system better than a discretionary system? When can discretionary systems outperform mechanical ones? The answers to these questions lie in understanding the uniqueness and advantages of each scheme.
A mechanical forex trading system is based on technical analysis done in a structured and organized approach. This kind of system uses stringent rules, well-defined data entry and exit criteria, and clear trade setups to determine if there is trade or not. As every aspect of trade follows a strict set of guidelines, guesswork in forex trading is taken out of the equation, and emotions are prevented from influencing trade decisions.
Its rigid rules make mechanical systems easier to automate. Traders would simply key in their rules into a software, and the software would do the rest.
A discretionary forex trading system brings in trade experience into the table. This forex system capitalizes on the trader’s experience and intuition in making decisions, especially in instances when logical systems can’t be fully applied. The discretionary system uses chart patterns and trend lines too, but it’s not defined by a precise set of rules.
As discretionary systems are not bound by strict rules, traders can easily adapt to changing market conditions and change their rules to address any unprecedented market scenario accordingly. To fully utilize this system, a great deal of experience and discipline are required.
The Bottom Line
It’s more advisable for newcomers in forex trading to start off with a mechanical trading system, usually offered by companies like Forex Malibu. This will help newbie traders to develop the necessary skills and discipline and gain some experience. It takes time to sharpen the skills and discipline required in forex trading. However, once done, moving toward a more discretionary system will be easier.
Given their clear distinctions, knowing how to balance the two systems can provide better gains as opposed to sticking to just one. For instance, you can apply a mechanical system to spot potential trades, then use a discretionary system to narrow down your choices.