Advanced GET Trading Blog: Rules Based Trading vs. Discretionary Trading

During a seminar over the weekend, I was asked why traders tend to focus so heavily on rules-based trading systems. Why would a trader turn themselves over to a system and discount the mental agility that they had gained by learning to read the market without the system? This led me to recall a paper on this exact subject by Jack Schwager. I thought this would be an appropriate place to discuss six key points of the benefits of mechanical trading.

Eliminates emotion.

- This is one of the largest challenges for traders to overcome. By using a proven system, traders are then restricted to only trade when the system illustrates the opportunity. The benefit of this is the fact that we remove one of the largest uncertainties in our trading (our emotional reactions to pleasant or unpleasant situations).

Eliminates the need for constant decision making

- The mind can play tricks on us. By focusing on the rules and the guidelines on which our business is founded, we can prevent the unconscious transition from trading to gambling.

Ensures consistency of approach

- Follow all the rules, all the time. The more rules of a trading strategy that are broken, the more risk is being unnecessarily introduced into your trades. Consistency is crucial.

Risk Control

- Some of the world’s best traders are not great at guessing, however; they tend to be extremely effective risk managers. This can be a boring aspect to learn at the onset, however, it is one of the most important lessons needed to be a successful trader.

Same approach can be applied to many markets

- This one speaks for itself. We all play in different areas of the sandbox. What we trade will vary, how we trade should be as consistent and structured as possible.