Mechanical Trading Strategies Vs. Discretionary Trading Strategies

Mechanical Trading Strategies Vs. Discretionary Trading Strategies – Differences

When it comes to trading, you can either use mechanical trading strategies or discretionary trading strategies. What is the difference, and which is better? Let’s find out.

Mechanical trading strategies refer to automated trading using trading algorithms with pre-set instructions. The primary purpose is to remove as much human emotional behavior as possible from the trading process. Discretionary trading, on the other hand, is decision-based trading — the trader decides which trades to make based on current market conditions.

Let’s go a bit deeper to understand the differences between the two approaches.

What are mechanical trading strategies?

Mechanical and Discretionary Trading Strategies

Mechanical trading strategies are any of the different methods of automating trading using pre-set criteria or triggers. The primary purpose of this approach is to remove as much human emotional behavior as possible from the trading decision-making process.

As you know, trading involves making many decisions: when to buy, when to sell, when to realize a profit, when to take a loss, etc. All those decisions can be tiresome and sometimes very difficult to execute or even prone to emotional mishaps; with mechanical trading, the rules are preset and coded into a trading algorithm that executes the trades without emotions.

A mechanical trading strategy can take any form — from as simple as automatically moving a specified dollar amount or paycheck percentage into a 401(k) account each month to strategies that are based on valuation markers like price-to-earnings ratio or technical indicators, such as moving averages, (simple or exponential), RSI, MACD, stochastic, and so on. Whatever the level of sophistication, mechanical trading minimizes the effects of emotions in trading.

Essentially, the benefits of mechanical trading systems can be summarized into the following points: automation, consistency, saving time, probability-thinking, exploiting the law of large numbers, and creativity.

What are discretionary trading strategies?

These are decision-based trading methods — the trader decides which trades to take based on current market conditions and the information available at the time. The decisions are made based on the trader’s personality and how they feel about the market. This type of trading is what most traders do.

Although discretionary traders use their discretion in taking the trade and managing it, they still have to follow a trading plan with clearly defined trading rules.

However, they can bend their rules when they think the conditions are different. For instance, they can increase their profit targets and stop loss if there’s high volatility and reduce those parameters or even suspend trading when there is low volatility. Also, if a trader knows that their strategy tends to perform poorly during certain market conditions, they will avoid trading during those times, and if they notice their strategy tends to perform very well in other conditions, they can increase their position size slightly during those times to maximize gains.

While some traders may figure out how to get in tune with the market, many other traders don’t get to achieve that and end up trading emotionally. Many traders are prone to second-guessing themselves and are poor at deciding when to trade and when not to. By its nature, the discretionary trading approach is susceptible to the trader’s psychology. For example, no matter how profitable a discretionary trading strategy is, being too greedy or fearful can destroy the profitability of that trading system in a hurry.

Is Mechanical trading and Discretionary trading the same thing?

Mechanical and discretionary trading is not the same – far from it. They are essentially two different approaches to trading the financial markets.

Mechanical trading is automated, but discretionary trading is manual-based. By automated, we mean that mechanical trading uses trading algorithms with preset rules: when the stock does this and this, buy; when it does that and that, sell.

Discretionary trading means that the trader decides whether to pull the trigger or not at every point in time. The trader has to make decisions in the heat of the moment. They can see an opportunity to buy and hesitate because they don’t feel right about the trade.

What is the difference between Mechanical trading strategies and discretionary trading strategies?

There are so many differences, including the following:

  • Automation: Mechanical trading is carried out by computer programs based on preset criteria, while discretionary trading is manually executed by the trader.
  • Consistency: By trading based on preset rules executed by computer programs, mechanical trading ensures consistency of trade criteria, which makes post-trading analysis easy and more reliable. Discretionary trading cannot offer that.
  • 24/7 trading: Mechanical trading can offer 24/7 trading, as long as the markets are open because the computer never sleeps — something humans cannot do.
  • Saving time: Mechanical trading saves a lot of time, unlike discretionary trading, which requires the trader to be present to execute trades manually.

What is best: mechanical trading or discretionary trading?

It should come as no surprise that this website is a strong advocate of mechanical trading. Some reasons are outlined earlier in the article, but the most important is that it gives you plenty of leverage. We are not talking about financial leverage, but leverage in the form of trading a “zillion” strategies (if you want to).

There are many reasons why you want to trade many strategies. It can give you a better equity curve because you can hopefully create many uncorrelated strategies. We don’t want to repeat ourselves, but we recommend reading our previous articles on the subject:

Why does correlation in trading matter? Jim Simons has created one of the best trading records of all time due to trading many uncorrelated strategies in many markets. Of course, he is unique, but even small traders like yourself can make something like this in miniature.

To sum up, one of the most important things in trading is to get your style depending on your personality. Some traders can’t follow the rules, and thus mechanical trading is not for them. Please read about what is the best personality type for trading or you can take a personality test for traders.


– What are mechanical trading strategies?

Mechanical trading strategies involve automated trading using algorithms with preset instructions. The goal is to minimize human emotional behavior in the trading process. These strategies can range from simple automated contributions to 401(k) accounts to sophisticated algorithms based on technical indicators.

– What are discretionary trading strategies?

Discretionary trading strategies are decision-based approaches where traders decide which trades to take based on current market conditions and their judgment. Traders following discretionary strategies still adhere to a trading plan with defined rules but have the flexibility to adjust based on market conditions.

– How do discretionary traders manage trades?

Discretionary traders use their judgment to manage trades, including adjusting profit targets and stop-loss levels based on volatility. They may also suspend trading during low volatility or high-risk conditions. However, they follow a predefined trading plan with clear rules.

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