What is discretionary trading? [Pros and cons]

In the world of investing and trading, there are many approaches to making market decisions –  from fully automated systems to methods based on human judgment. One of the most engaging and demanding styles is discretionary trading. Although it provides a lot of freedom and the possibility of full control over transactions, it also poses specific challenges to the investor.

In this article, we explore what exactly discretionary trading is, how it works, who it may be suitable for, and what skills are needed to use it effectively.

What is discretionary trading?

Discretionary trading is a style of trading in which investment decisions are made at the discretion of the trader, and not according to rigidly defined rules or algorithms. In simpler terms, a discretionary trader himself decides when to buy or sell, guided by your own analysis, experience and intuition. This is an approach subjective, in which each order is opened and closed based on the feelings and judgment of the trader who trusts his market knowledge and the ability to draw conclusions quickly and flexible responding to market changes.

In contrast to mechanical trade (systemic or algorithmic), where decisions are determined by predetermined criteria and formulas, discretionary trading is not based on an automated signal system - here there are no iron rules procedures in force in every situation. The trader is guided by a combination of various factors: analysis of current market data, news and announcements, economic indicators or technical analysis signals, but the final decision belongs to a human being, not for the program.

Pros and cons of discretionary trading

Discretionary approach to stock market trading gives the trader a lot freedom and flexibility in trade. A discretionary trader can adjust his actions to the current market situation, taking into account the context that quantitative models may miss. This allows him to respond to unique trading opportunities or unusual market conditions – such as sudden political or economic events – better than rigid algorithms. In other words, the discretionary approach allows for adaptation: if the market behaves differently than usual, an experienced trader can change the plan on the fly, while an automated system might not anticipate such a change. Second, the discretionary strategy allows you to use intuition and experience, traits often developed through years of practice. Discretionary traders often emphasize that over time they develop a "sixth sense" for the market and are able to sense signals that cannot be written down in a rigid set of rules. Such intuition can help spot hidden opportunities or threats before mechanical models react to them.

Discretionary strategies can therefore adapt more effectively to market conditions that deviate from the norm. Another advantage is control panel over capital – the investor decides on every move on an ongoing basis, which is psychologically comfortable for many people. Some people like to “have their finger on the pulse” and feel that they are directly managing their money, instead of relying on the “black box” of an algorithm.

In addition, discretionary trading provides the opportunity to learn from every trade because the trader is involved in the entire decision-making process, and over time builds increasingly richer experience. This practical knowledge can pay off, and every mistake and every success teaches something new, which is hard to replace with passive tracking of an automated system (it's different if you build such a system yourself, from scratch). For experienced professionals, discretionary trading can be a way to use your own intellectual or informational advantage that others don't have.

On the other hand, there is no stiff rules means that discretionary trading depends largely on psyche and skills the investor himself. This approach requires strong discipline and control of emotions, because a person is susceptible to various emotional prejudices (such as fear of loss, greed in pursuit of profit or overconfidence) that can distort the objectivity of decisions. In practice, this means that two people using discretionary trading can achieve completely different results, depending on how they react to stress and pressure and how broad their market skills workshop is.

The lack of an objective, automated structure also makes discretionary trading inconsistent.y: one decision may result from in-depth analysis, while another may be more of a spur of the moment decision. As a result harder to evaluate and improve such a strategy because the results cannot be easily repeated or measured according to a constant metric, and success or failure often depends on subjective factors.

Moreover, lack of automation it also means that the trader has to sacrifice more time and attention to track the market. Analyzing charts, information and your own positions requires constant engagement – ​​it is time-consuming and can be mentally taxing. Unlike an algorithmic strategy, which can work even when the investor is asleep, the discretionary approach requires human presence and vigilance.

All this makes discretionary trading high entry threshold and a high risk of failure for beginners. Statistics from most brokers indicate that the vast majority of beginner traders lose money trying their hand at discretionary trading. Lack of skills, planu and discipline causes many people gets discouraged after a series of defeats and ends his trading adventure.

Source: Own study.

Who is discretionary trading for?

So who might be best served by a discretionary approach? First and foremost, those who they want to get actively involved in the investment process. Such traders should like to analyze market and make decisions independently.

It is necessary high resistance to stress, ability to behave cold-blooded in case of sudden fluctuations in prices and the ability to react quickly. It will also be useful patience and humility – not every transaction will be profitable, so you need to be able to accept a loss and draw conclusions from it without panicking or being reckless. Discretionary trading can be a good choice for investors who have developed the basics of analysis (e.g. can read charts, understand financial data) and for those who they have timeto actively track your investments.

This style is popular among day traders and speculators short-term investors who constantly monitor the market and make many trading decisions during the week or even during the day. It also works well for medium-term investors, the so-called swing traders, who, although they hold positions for longer, also actively manage them (e.g. by moving stop-losses or taking partial profits).

However, this is not a strategy for everyone. People with a low risk tolerance, who cannot control their emotions or do not have time to constantly monitor the market may feel better in a systematic approach or in long-term strategies where the rules are set in advance. On the other hand, those who value freedom of decision and believe in their own analytical skills, often find satisfaction in discretionary trading.

Skills needed, to effectively apply the discretionary strategy, are versatile. First of all, they are required analytical competences – a good discretionary trader is familiar with technical and/or fundamental analysis and is able to combine various pieces of information into a coherent assessment of the market situation. He must be able to filter information noise and extract what is essential for his decision.

It is extremely important discipline and risk management. Even the most intuitive investor should use basic capital protection tools such as stop losses (“hard” or “soft”), appropriate position sizes, and diversification. A good risk management system is essential because it protects against catastrophic losses if you get it wrong.

Another key skill is the ability to stick to a plan when tempted to break it. A discretionary trader should work on self-control, so as not to succumb to impulsive reflexes. It helps to conduct transaction log and your own feelings, thanks to which you can recognize typical psychological traps over time and avoid repeating mistakes.

It is also necessary ability to make decisions quickly under time pressure (especially in day trading) and flexibility of thinking, or the willingness to modify your assumptions when circumstances change.

Finally, nothing can replace experiences or for those who are just starting out, just market practice. This is the basic building block of a trader's intuition - the more market situations a trader has experienced, the richer the "data base" in his head from which he can draw in subsequent decisions. Experienced investors often emphasize that there are no shortcuts to master discretionary trading. It is a skill honed over years of practice, observation and drawing conclusions from successes and failures. Books and courses can provide theoretical knowledge, but confidence in action is gained primarily through real experience.

Summary

Discretionary trading is an approach that involves active investment decision-making by the trader, based on his own judgment, which is often preceded by a meticulous market analysis.

It is characterized by a large flexibility and the possibility of using human experience and intuition, which can be an advantage in changing market conditions, compared to other styles of playing on the stock exchange. At the same time, it requires self-discipline, knowledge and mental resilience, and also involves the risk of making mistakes under the influence of emotions.

For the right people, that is, those who are passionate about the market, disciplined, and willing to put in the time to continuously improve, discretionary trading can be an effective and satisfying strategy investment. However, each investor must assess for themselves whether this form of action suits them, taking into account their own characteristics, skills and goals as well as the time they can devote to trading.