Table 1.1 compares two extremes in trading: a discretionary trader and a 100% mechanical system trader. Discretionary traders use all inputs that seem relevant to the trade: fundamental data, technical analysis, news, trade press, phases of the moon—their imagination is the limit. System traders, on the other hand, slavishly follow a mechanical system without any deviations. Their entire focus is on implementing the system "as is," with no variations, exceptions, modifications, or adaptations of any kind.
Exceptional traders are discretionary traders, and they can probably outperform all mechanical system traders. Their biggest advantage is that they can change the key variable driving each trade, and therefore vary bet size more intelligently than in a mechanical system. Discretionary traders can change the relative importance of their trading variables so they can easily switch between trend-following and anti-trend modes. They can instantly switch between time frames of analysis, going from 5-minute bars to weekly bars as their assessment of the trading opportunity changes.
Discretionary traders can make better use of market information other than price. For example, they can react to news or fundamental information to change bet size. Discretionary traders can adjust their perceived risk constantly, so they can increase or decrease positions more intelligently than mechanical traders. These infrequent "home runs" often make all the difference between good and great trading performance. However, for the average trader, being a mechanical system trader probably maximizes the chances of success.
The goals of a mechanical system trader are to pick a time frame (for example, hourly, daily, weekly), identify the trend status, and anticipate the direction of the future trend. The system trader must then trade the anticipated trend, control losses, and take profits. The rules
Table 1.1 Comparison of trading styles: Discretionary versus mechanical