Discretionary Trading: A Way to Avoid Volatility

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Discretionary Trading

People in the finance world often talk about “discretionary trading.” This is a way of trading where traders make choices based on their knowledge and opinion instead of following a set algorithm or system. This method is based on individual learning, which lets buyers adapt to market changes immediately. In this article, we’ll get into the specifics of discretionary trading, look at its features, contrast it with systematic trading, and weigh the advantages and disadvantages of each.

What Is Discretionary Trading?

Discretionary trading is a style where decisions are made based on the trader’s judgment, intuition, and experience. This trading style doesn’t totally ignore technical analysis or underlying data. Instead, it combines them with the trader’s ideas and market knowledge. 

A big part of discretionary trading is that markets change over time and are often affected by psychological and emotional factors. These are the factors that computers can’t fully understand. Successful discretionary traders usually take a disciplined approach. They set strict rules for managing risk and keep improving their strategies based on feedback from the market and study of how well they are working.

Key Takeaways

  • Discretionary trading is a trading approach where decisions are made based on individual judgment, blending technical and fundamental analysis with personal insight.
  • This method values the trader’s ability to interpret market trends and economic events, utilizing their deep market knowledge and experience.
  • Discretionary trading differs from systematic trading by its flexibility and adaptability, allowing traders to respond to real-time market changes.
  • While offering the potential for high rewards due to its adaptive nature, discretionary trading also involves significant risks.
  • Discretionary trading demands a high level of market understanding and emotional control, making it more suitable for experienced traders.

5 Characteristics of Discretionary Trading

1. Trader Autonomy and Judgment

The most defining characteristic of this trading style is the autonomy it grants to the trader. Decision-making is based on the trader’s judgment, instincts, and experience. This autonomy allows for a nuanced understanding of market conditions that a purely systematic approach might miss.

2. Flexibility and Adaptability

Discretionary traders can quickly adapt their strategies to changing market conditions. Rigid algorithms do not bind them and can pivot their approach in response to new information or unexpected market movements.

⚠️Tip: Regularly update yourself with global financial news and market changes. This ongoing learning is vital for adapting strategies promptly.

3. Reliance on Technical and Fundamental Analysis

While discretionary traders rely heavily on their judgment, they also utilize technical and fundamental analysis as a foundation for their decisions. They interpret this data through their own market experience and intuition.

4. Emphasis on Risk Management

Successful discretionary traders place a strong emphasis on risk management. They often set clear rules regarding stop-loss orders, position sizing, and overall exposure to mitigate potential losses.

5. Psychological and Emotional Resilience

This trading style requires a high degree of emotional control and psychological resilience. Traders must maintain their composure under stress and avoid emotional decision-making, which can lead to impulsive and potentially unprofitable trades.

Differences Between Systematic and Discretionary Trading

This part will be shown as a comparison table to make the differences between systematic and discretionary trading stand out:

AspectSystematic TradingDiscretionary Trading
Decision MakingBased on algorithms and fixed rules.Based on individual judgment and experience.
FlexibilityLimited; strictly follows predefined strategies.High; can adapt strategies in real-time.
Data UtilizationRelies heavily on quantitative data and historical models.Uses both quantitative data and qualitative insights.
Emotional InfluenceMinimized, as decisions are automated.More prevalent, requiring emotional control and discipline.
Adaptability to Market ChangesSlower, as changes require algorithm adjustments.Faster, as traders can immediately respond to market changes.
Risk ManagementSystematically defined and consistently applied.Varied, often tailored to individual trade and market conditions.
Suitability for TradersIdeal for those who prefer a more structured approach and less emotional involvement.Suitable for traders with deep market knowledge and the ability to manage emotional and psychological aspects.

This table highlights the fundamental differences between the two trading approaches, emphasizing the more structured, rule-based nature of systematic trading compared to the flexible, judgment-based approach of discretionary trading.

Pros and Cons of Discretionary Trading

Adaptability to Market Changes

This trading style allows traders to adapt to market fluctuations, capitalizing on opportunities quickly.

Personal Judgment and Expertise

This style leverages the trader’s expertise and insight, potentially leading to better decision-making in complex market scenarios.

Flexibility in Strategy

Traders can modify their strategies based on current market conditions, allowing for dynamic and responsive trading.

Ability to Consider Qualitative Factors

Discretionary traders can incorporate qualitative factors such as market sentiment and geopolitical events, often overlooked by systematic approaches.

Potential for Exceptional Returns

With the right skills and market conditions, This style of trading can yield higher returns than rigid, systematic strategies.

Emotional Risks

The involvement of personal judgment can lead to emotional trading decisions, potentially resulting in higher risks.


This approach requires constant market monitoring and analysis, demanding significant time and effort.

Subject to Human Error

Relying on personal judgment means trades are more susceptible to biases and errors in decision-making.

Inconsistency in Results

The success of discretionary trading can vary greatly, leading to inconsistent performance over time.

Requires Extensive Experience

Effective discretionary trading demands a deep understanding of the markets and significant experience, making it less suitable for beginners.

Who Should Consider Discretionary Trading?

Discretionary trading is best for traders with a lot of experience who know how markets work and how to interpret economic signs and global events. This trading style takes a lot of time because you must keep looking at the market and reading financial news constantly. 

The only people who should do it are those who have the time and strong risk management skills. People new to trading or who like a more organized, systematic approach should refrain from using discretionary trading.


In conclusion, discretionary trading represents a nuanced and dynamic approach to financial markets, emphasizing the trader’s judgment and flexibility over rigid algorithms. This style also comes with its challenges, including the need for extensive market knowledge, emotional control, and robust risk management. 

Discretionary trading is not a one-size-fits-all solution; it requires a specific skill set and mindset. As such, it is best suited for experienced traders who can navigate the complexities of the market with insight and discipline. For those considering this path, it’s important to weigh its pros and cons carefully and to understand that success in discretionary trading comes from a blend of experience, knowledge, and a well-calibrated approach to risk.


1. What is discretionary trading?

Discretionary trading is a style where decisions are made based on the trader’s judgment, experience, and insights rather than following a strict set of rules or algorithms.

2. What is the difference between systematic and discretionary trading?

Systematic trading relies on predefined rules and algorithms, offering consistency and minimizing emotional influence. In contrast, discretionary trading depends on individual judgment and flexibility, allowing for quick adaptation to market changes.

3. What are the requirements for discretionary trading?

Discretionary trading requires a deep understanding of the financial markets, strong analytical skills, emotional control, and effective risk management strategies.

4. What are the main challenges faced by discretionary traders?

The key challenges include managing the emotional aspects of trading, the need for continual learning and adaptation to market changes, and the risk of inconsistency in decision-making.

5. Is discretionary trading suitable for beginners?

Discretionary trading is generally not recommended for beginners due to its complexity and the significant amount of market knowledge and experience required.

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