There are two styles of trading: discretionary and mechanical systems based.
Discretionary traders evaluate potential trades based on their trading plan, using technical analysis to determine if each trade meets their requirements. Although the discretionary trader’s rules are known, the trader decides to take or pass on trades based on their experience. The discretionary trader doesn’t follow a firm algorithm of entries and exits. Instead, they weigh all available information, and then make a call.
Mechanical systems, on the other hand, are trading strategies that a computer program can execute. The mechanical system is often based on technical inputs such as price and indicators. The strategies are usually programmed into a computer software program that can backtest them on historical market data to determine if they produce positive expectancy: namely, if they produce higher profits than losses over the long term and in comparison to the overall market. Rarely does a trader need to make a decision when using mechanical systems. Institutional trading, high frequency trading and algorithms are all examples of mechanical systems based trading. There are many firms, educators, traders and even online scammers who develop these types of computer programs and systems and sell them to traders.
The two approaches both have advantages and disadvantages: discretionary trading offers a fresh look at each trading opportunity and lets the trader pass on trades when information that may not be easily captured in a computer program indicates a decreased chance of success. However, because the discretionary trader must make a decision for each trade, traders are more prone to emotional trading and acts of self-deception, such as falling in love with a trade, hat will often result in a failure to follow their trading plan.
Mechanical trading, on the other hand, largely takes the trader’s decision-making process out of the equation. A computer algorithm executes the trades as programmed. The only input on the trader’s part is the amount of capital devoted to each trade. The trader just determines the share size, and after that the trader can step back and watch the computer work its magic. But mechanical trading systems also have their drawbacks. Can a system be designed to capture all contingencies or possibilities that may arise? I don’t believe so. And when losses occur, the mechanical trader must determine whether the loss is a temporary part of the system or whether it represents a fundamental failure of the strategy.
My strategies and this book are geared heavily toward discretionary systems. I believe many requirements of a successful trade, such as price action and recognizing chart patterns, can’t be easily programmed into a computer. I feel more in control when I myself evaluate each trade instead of relying on a computer to execute transactions.