Episode 2: The Difference Between Systematic Trading and Discretionary Trading

What is System Trading?

Definition of System Trading

System trading is a method of automatically executing trades by a computer program. Based on predetermined rules, it determines the timing of buys and sells and the trading volume.

Advantages of System Trading

• Eliminates emotions and makes objective judgments: Human emotions can distort trading decisions. With system trading, there is no emotional intervention and decisions are objective.
• Possibility of continuous trading: Humans need breaks, but computers can run 24 hours. Therefore, system trading enables continuous trading.
• Can operate multiple strategies simultaneously: For a single person, using multiple strategies at once is difficult, but with system trading, it is easy to run multiple strategies concurrently.

Disadvantages of System Trading

• Cost of system development: To perform system trading, specialized knowledge and skills are required. Therefore, developing a system takes time and money.
• Difficulty in adapting to changing market environments: When market conditions change, the system trading rules may no longer work. However, revising or changing the system is not easy, making it hard to respond to changes in the market environment.
• Risk of over-optimization: Systems overly optimized to historical data may fail to adapt to future markets. This is commonly referred to as curve fitting or overfitting. This risk is called the risk of excessive optimization.

Discretionary Trading

Definition of Discretionary Trading

Discretionary trading is a trading method in which you decide the timing and amounts of trades yourself, leveraging your knowledge and experience. You analyze market conditions yourself and make buy/sell decisions.

Advantages of Discretionary Trading

• Flexibly respond to changing market conditions: In discretionary trading, you determine and adapt to market changes yourself. This allows you to profit even in market situations that are difficult for system trading to handle.
• Utilizes personal experience and skills: You can trade using your own knowledge and experience, leveraging your strengths to generate profits.
• Control trades by your own decisions: Since you decide the timing and amounts yourself, you can control trades according to your own will.

Disadvantages of Discretionary Trading

• Emotions can intervene easily: In discretionary trading, emotions can intervene, making it difficult to trade as planned. If influenced by emotions, losses can increase.
  
• Difficult to maintain continuous trading: Because you trade by yourself, maintaining continuous trading can be difficult. Especially when busy with school or work, you may miss trading opportunities.
• Difficult to achieve efficient trading: In discretionary trading, analysis and judgment take time, making efficient trading difficult. It is also hard to operate multiple strategies simultaneously.

Differences Between System Trading and Discretionary Trading

Differences in Trading Style

System trading automatically trades according to pre-set rules. In contrast, discretionary trading involves deciding the timing and amount of trades using your knowledge and experience.

Differences in Risk Management

In system trading, trades occur automatically according to rules, so emotions do not intervene and risk management is easier. In discretionary trading, emotions can intervene, making risk management more difficult.

Differences in Performance

System trading trades based on optimized rules derived from past data, so stable performance can be expected. However, it is hard to adapt to changes in market conditions. Discretionary trading can adapt flexibly to market changes, potentially achieving higher performance, but performance can be affected by emotions and consistency.

Characteristics suited to each trading style

People suited for system trading are those who want to trade automatically according to rules, want to eliminate emotions and trade objectively, and want to run multiple strategies simultaneously. On the other hand, people suited for discretionary trading are those who want to trade leveraging their knowledge and experience, want to flexibly respond to market changes, and want to control trades with their own decisions.