What is Discretionary Trading? : NobleTrading Blog

Friday, December 4, 2009

What is Discretionary Trading?

Discretionary trading or decision trading is one of the two popular trading methods; the other is system trading. It is the trading practice where the trader uses his intelligence and knowledge to make trading decisions with respect to the information available at the time. Discretionary traders rely on their ability to find opportunities and execute trades to make profits from the market.

Discretionary traders can also use trading systems for finding opportunities, screening stocks and charts, finding entry points, etc. But usually the key decisions such as position size, target price, stop-loss and exit points are taken manually. Thus decision trading requires good trading knowledge and hopefully some trading experience.

The first and foremost thing to note is that discretionary trading puts pressure on the mind. But the trader can use trading system(s) to ease up the process.
As decisions are made manually, large-scale trading and trading a variety of markets/instruments/securities in short-term intervals might be difficult.
The strategy is better for swing trading, intermediate and long-term trading; but not for short-term trading such as intraday trading.
The strategy is good for persons who want to conduct trades with a high degree of control, persons who can spend time for stock screening/trading.
Discretionary trading offers more flexibility and adaptability.
Human feelings like fear and greed can cause problems in executing successful trades.
Decision based trading demands a high degree of discipline, proper timing and attention.