There are two types of Forex trading systems, mechanical and discretionary systems. The trading signals emanating from mechanical systems are mainly based on technical analysis applied systematically. On the other hand, discretionary systems use experience, intuition, or judgment in the entries and exits. So which one produces better results? Or, more importantly, which one fits your trading style better? These are the questions we will try to answer in this article.
First, we will analyze the pros and cons of each system approach.
Such a system can be automated and backtested efficiently.
It has very strict rules. Either there is a trade or there is not.
Mechanical traders are less sensitive to emotions than discretionary traders.
Most traders test Forex trading systems incorrectly. You need tick data to produce accurate results.
The Forex market is always changing. The Forex market (and all markets) have a random component. Market conditions may look similar, but they are never the same.
A system that worked successfully last year does not mean it will work this year.
Discretionary systems can be easily adapted to new market conditions.
Trading decisions are based on experience. Traders learn to see which trading signals have a higher probability of success.
They cannot be backtested or automated as there is always a thought decision to be made.
It takes time to develop the experience needed to trade successfully and track trades in an on-demand way. In the early stages, this can be dangerous.
Now, which approach is better for Forex traders? For example, if you are a trader who struggles to follow your trading signals, you would be better off using a mechanical system where your judgment will not play a significant role in your system. You only take the trades that your system signals.
If the psychological barriers that affect every trader (fear, greed, anger, etc.) put you in undesirable scenarios, you are also better off trading with mechanical systems because you only need to follow what your system tells you, go short, go long, close a trade. No other decisions need to be made.
On the other hand, if you are a disciplined trader, you are better off using a discretionary system because discretionary systems adapt to market conditions and you can change your trading conditions as the market changes. For example, you have a target of 60 pips on a long trade. But the market suddenly starts to rise quite strongly, then you can move your target to 100 pips.
Does this mean that there are no rules to trading with a discretionary system? This is wrong. Trading discretionary systems mean that once a trader finds his or her setup, the trader then decides what to do next. But every trader needs certain rules that need to be followed, such as the size of the position, and conditions that need to be met before considering entering the market.
I am a discretionary trader. The main reason why I chose a discretionary system is that my trades are based on price behavior, and as you already know, the price behaves similarly to the past, but never the same, so the outcome of each trade is unknown. However, I have strict rules in my system, certain conditions have to be met before I even consider entering a trade. This keeps me out of trouble, once my setup is in place and following the rules I have set, then I closely monitor the price behavior and eventually decide if this is a good opportunity or not.
Whether you choose to be a discretionary or a mechanical trader, there are some important points to consider:
1. You need to make sure that the Forex trading system you use fits your personality completely. Otherwise, you will find yourself guessing your system.
2. You also need to have some rules and most importantly you need to have the discipline to follow them.
3. Take your time to create the perfect system for you. It is not easy and it takes time and hard work, but in the end, if done right, it will give you consistent profitable results.
4. Before going live, try it out on a demo account or even a small account (I would prefer the second option as psychological barriers will be present).