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Discretionary versus systematic

The distinction between trading on judgement applied to a framework and trading on rules executed without deviation.

A systematic trader specifies entries, exits and sizing in advance and follows them. A discretionary trader uses a framework but makes judgement calls about context. Most real trading sits somewhere between, which is fine as long as you know where.

Each has a characteristic failure. Systematic approaches break when the market regime changes in a way the rules never encountered, and they are vulnerable to overfitting during development. Discretionary approaches break under pressure, drift without the trader noticing, and are almost impossible to evaluate because the rules change silently.

The practical middle ground is to write down the parts that can be written down, especially position-sizing and invalidation-level, and to record the judgement calls in a trading-journal so they can be reviewed like anything else.

Related: setup, overfitting, trading-journal, position-sizing, trading-plan

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

How a position size is worked outAccount size, risk per trade and stop distance feed into one box giving the number of shares.ACCOUNT SIZE$25,000your capitalRISK PER TRADE1%of the accountSTOP DISTANCE$0.50entry to stopPOSITION SIZE500 sharesrisk budget: $25,000 × 1% = $250position size: $250 ÷ $0.50 = 500 shares
Working out a position size. Three numbers decide how big a trade is: the account, the share of it put at risk, and the distance from entry to stop. One percent of $25,000 is a $250 budget, and a $0.50 stop divides into that 500 times.

Educational only, not advice. Spotted an error? Post in Site Feedback.