The Tale of Two Trading Types
When we talk of the Forex trading systems, there are two approaches that are most prominent. One is the mechanical and other is the discretionary. This article will shed light on the pros and cons of both the systems. Also, we will try to help you figure out which approach will be better for you as a Forex trader.
Understanding Mechanical Systems
The type of trading signals that mainly come out from the mechanical Forex trading systems are actually based on the technical analysis that is applied in a systematized way.
Understanding the Discretionary Approach
Unlike the technical analysis made use in the mechanical systems, the discretionary approach uses more of experience, and intuition and judgment over the entries as well as exits.
Mentioned below are the pros & cons of using each of these approaches:
Mechanical Forex Trading Systems (Advantages and Disadvantages)
Advantages
- Easy to automate efficiently
- Easy to back-test proficiently
- Rules are rigid, either there is trade or there is no trade
- Less on emotions, more on analysis
Disadvantages
- Back-testing goes wrong more often than not
- Forex market always changes and thus the difficulty in analysis
- System proved useful last year might prove futile the next year
Discretionary Forex Trading Systems
Advantages
- Comfortably adaptable to changing market conditions
- Trading decisions made over hands on experience
- Trading works on picking up signals that have higher success probability
Disadvantages
- Can’t be back-tested
- Can’t be automated
- Developing experience takes time, sometimes even many years
- Not a feasible approach for new traders who lack experience
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Mechanical or Discretionary – What’s Your Pick?
Going through the pros and cons of both the types of Forex trading systems, you might be wondering which one is better for you? You must be thinking which approach you must try to fetch better results? In other words, which approach fits your style of trading? You will get answers to these queries below.
Want to Be Free from Psychological Barriers? Go Mechanical!
There are some psychosomatic barriers like fear, anger; greed to name a few that might haunt you if you choose the discretionary style of trading. If you want to avoid such scenarios uncalled for, then you will be better off trying mechanical trading systems. Mechanical approach tells you all about the system, to go short, to go long, and to close the trade. To make it clearer, if you find it really very hard to follow what your discretion tells you to do, then you must go mechanical. Being mechanical, you don’t have to apply your judgment; you just do the trade as the system signals you to.
Discretionary Approach Suits Disciplined Traders
Disciplined traders are better off with discretionary Forex trading systems. Experience speaks here. It takes you years to learn the market. Adapting to market conditions is easier and you can change your trade conditions when the market is set to any change. This surely does not mean that discretionary trading no rule-book. There are rules that one must follow, like the position size, conditions that are to be met prior to the entry into the market, so on and so forth.