In the broad category of “trading the markets,” there are basically three types of
trading: discretionary, technical, and strategy-based. When I sat down to write this
article, my intent was to write only about strategy trading. But then I realized that
to fully describe strategy trading, it was also necessary to discuss discretionary and
Technical trading. It’s important that you understand the difference between them, which is not always clear.
Many people believe they are strategy traders, when they’re actually technical traders, and vice versa.
I have known and taught many traders, and have observed that there are four
Distinct stages of trader education: discretionary trader, technical trader,
Strategy trader, and complete strategy trader.
All successful traders have gone through them. It is almost impossible to be a successful strategy trader without going through all of these stages. My goal with this article is to help you understand and move through the stages at much less cost in both time and money.
Every trader usually starts out as a discretionary trader.
The amount of money lost generally determines how long it takes the individual to start using technical indicators to make trading decisions.
Eventually, as even employing technical indicators fails to move the trader into profitability, the trader moves into the third stage and starts to write strategies based on quantifiable data. It is at this stage that the trader ordinarily starts to make money. Finally, the strategies and money management approaches are refined and the individual becomes successful as a strategy trader.
What trading tools are used by discretionary Traders to determine when to enter and exit the market?
Discretionary trader uses a combination of intuition, advice and no quantifiable data to determine when to enter and exit the market.
Discretionary traders are not restricted by a concrete set of rules.
If you are a discretionary trader, you can make buy and sell decisions using whatever criteria you deem to be important at the moment. For example, you can use both a
Combination of hot tips and relevant news stories from Sky News or even CNN, and enter or exit the market based upon this information. If you begin to lose money, you can immediately exit the market and change your trading method. You don’t have to use the same techniques day in and day out. It’s a very flexible way to trade that you can customize based on what you think, the market is going to do at any given moment.
For the discretionary trader, trades are made using gut instinct and intuition.
Unless a computer is generating a buy or sell signal and you actually follow the
Signal, your emotions will affect your trading. I explained in the introduction what
Problems instinct and intuition could be in trading. Remember fear and greed? In
Discretionary trading, technical tools such as indicators are sometimes used;
However, when they are put to use, they are utilized sporadically as opposed to
Systematically been fascinated by the markets, the discretionary trader is ready to put on a trade at a moment’s notice. The most uncomfortable part of trading for the discretionary trader is when there is no action. So he will jump on any piece of information, anything that will permit him to take a stab at the market. Above all, he craves the action.
Hot tips are a common way that a discretionary trader gets ideas.
The discretionary trader uses several sources for his trading decisions.
One is intuition, for example, I see a lot of people in stores, so I think the economy is good, and earning will increase, so the stock market should go up, and I should
buy Sears. He usually spends a lot of time talking to his broker.
A call from his broker or good friend, or a tip from a discussion at a cocktail party are all places the discretionary trader gets his trading ideas.
Hot new product in the works, here’s a stock you can pick up cheap. A news story on the nightly news may cause a discretionary trader to short the airline that has just had a crash.
Discretionary Trader, loves Gambling, craves the risk, the excitement of trading.
What a discretionary trader loves is the excitement. He loves being in the
Markets, playing with the big guys. He craves the risk, the excitement of trading,
and the gambling .
Calling his broker and putting in the order to buy, based on the news story of the health hazards. He has a real obsession for buying Cotton based on the hot tip from his broker that the upcoming crop report was going to be bullish. Discretionary traders retain the flexibility of changing their buy and sell criteria from moment to moment, and change they way they trade from minute to minute, and day by day. They don’t have any discipline, nor do they think they need any. They use their intuition and their gut instinct, and feel justified in doing so. They think, making money is easy; you just have to be smarter and quicker than the next guy.
I personally don’t know anyone who has made money by discretionary trading.
They may have been lucky and won on a few trades, but overall, over time, discretionary traders always lose money.
It is after enough money has been lost that the discretionary trader in some ways stumbles across technical indicators. It may be from the chart book he just looked
at where there was a Stochastic Indicator underneath the chart.
So this is how they do it!” These indicators look like magic.
They add some rationality to an otherwise irrational trading style.
He thinks, this must be how the big money players make the big money—they use technical indicators!
Once the discretionary trader discovers technical indicators, he or she
incorporates some rudimentary ones into trading.
usually as additional justification for making the trade. “Not only did Ralph (my broker) tell me to buy I am now a real objective strategy trader.” While the trader may
view himself as a strategy trader, this could not be farther from the truth. The
Discretionary trader’s style is still undisciplined, based on newly educated guesses,
and he is probably still losing money.
Now our trader has a whole new world in front of him—the world of
technical trading.
For a moment, these technical tools were thought to be the answer, and
While they add a little more rationale to his trades, the losses continue to pile up. Despite his continuing angst, our discretionary trader is now on the way to becoming a technical trader. For a while, this newfound world combines with intuition and the discretionary trader views himself as a strategy trader. He says, “I trade a strategy using moving averages and Stochastic with a dash of daily news and tips from my broker.
