Systematic vs. Discretionary Trading

Before delving into the world of trading, a trader must decide on an approach to seek profits from the market. Traders will need to decide between a systematic approach—one based on specific rules that determine markets and entry and exit points—or a discretionary approach, which may include technical data and rules but where the trader maintains the final decision on a trade. Here we study whether systematic or discretionary trading styles yield superior performance results. In examining this question, we will discuss some of the basic characteristics of each and how they relate to return drivers, strategies, trade generators (fundamental or technical) and sectors. Additionally, we will analyze whether the benefits of diversification extend to styles.

There are numerous variations of both systematic and discretionary trading strategies. Many strategies incorporate both to varying degrees and could be defined as a systematic strategy with discretionary overlays or a discretionary strategy with systematic overlays. The one overriding difference between the two styles is that systematic trading strategies generate a definitive signal, whereas a discretionary strategy allows the trader to make the final call on price and time.

Most people’s perception of systematic and discretionary trading may have been more accurate 20 years ago. Nowadays, systematic strategies are not just simple strategies trying to exploit price and time data. Most are an amalgamation of trading rules that attempt to capitalize on momentum, mean-reversion, carry, value or other return drivers incorporated with well-defined risk management parameters.

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