Intermediate Level

Learn more complex tools and techniques that will help you in trading.

Lesson 2: Discretionary Trading

Unless you
are highly talented, as a trader, you will use a trading scheme to assist you when
deciding on lucrative trades. The trading scheme can be stiff, with regulations
that are well established and must be complied with, or some flexibility can be
constructed into. The first sort of scheme is often referred to as a mechanical
trading scheme on the grounds that a machine or some software would be capable
of applying it. The second sort of trading scheme is a discretionary trading
scheme that allows you to make a choice.

Mechanical Systems vs Discretionary
Trade

Arguments
remain on the merits of the corresponding mechanical systems vs. discretionary
trading policies, and it is probable that they will not be readily resolved. For
beginners, a mechanical system can save some costly classes, but discretionary
trading when someone understands what they’re doing can deliver strong
outcomes.

A
discretionary trading scheme may work for you, but if you are comparatively new
to differential trading, you may find it is not such a great fit. It really
relies on how much discretion you have, and on what specific aspect of trade
you have. Many elements of trading play on your feelings, and if you pursue
those with no appropriate knowledge, you can rapidly unravel.

To be
evident, discretionary trading does not imply that the trader is shooting in
the dark. Trading is a business, and if you don’t teach yourself about the work
you’re applying for, you can expect disappointing outcomes. Discretionary
trading with CFDs may be a brief step away from the use of a mechanical scheme,
with discretion being exercised only in a small manner, or the scheme taken may
require the trader to take a bigger role in the assessment, such as drawing
trend lines on the graph so that he can see when they are crossed as an
indication of trade.

However,
much judgment is needed to rule on trades, trading in CFDs using discretionary
trading should not be considered the same as not having a plan. Some
individuals may even carry their trading plan in their heads rather than write
it down, but for achievement there must be a technique of operation that makes
sense in the context of the markets. Without a plan, a trader won’t last long.

There are
a number of elements to the trading scheme. It should define the specific
economic safety to trade with an indication of which direction, lengthy or
short; it should give rise to trade; it should cope with money management, at
least by setting limits on how big the trade is to be; and it should inform you
when to liquidate the trade and leave the position, whether with a profit or a
loss. In theory, you could have a scheme where you could exercise discretion on
any of these variables.

Discretionary Trading is not for
the Novice

Discretionary
Trading, other than at its most basic, is not for the novice, but for traders
who have served their time, have learned in-depth technical analysis, and are
able to adapt easily to changing circumstances. A discretionary CFD trader can
recognize the comings and goings and has the expertise and intuition to create
a sound judgment with respect to trade entrances and exits. Such traders have an
extensive knowledge of all elements of trading, and there would be almost
nothing fresh under the sun in terms of trading for them. They must be
acquainted with the usual indices and patterns of the graph and be able to see
a trend in their infancy.

Perhaps
the most evident place where you could exercise discretion is the choice of
safety. While you could tell your mechanic scheme to try out many distinct
financial instruments and come up with the one that works best, the
discretionary trader may decide to stick to, for example, trading CFDs on
market indices. If the other elements of trade are controlled by regulations,
this should not be too detrimental to your account.

On the
other side, say that your scheme needed you to pick an entry point based on a
chart view. If you were experienced, you might learn to define the appearance
of the graph just before the upswing, and schedule your trades properly, but
the novice trader might as well be entering the situation on the flip of the
coin. Now, it’s not to say that you couldn’t benefit from such a move–after
all, Van Tharp has shown that in his commonly read classic “Trade Your Way to
Financial Freedom,” he outlined an experiment with random market entries that
resulted in a typical gain by focusing on excellent cash management. But your
scheme would not take the greatest benefit of market opportunities.

Even with
the discretionary trading of CFDs, there are some significant variables that
must be considered in any decision. The first is that there must be a technique
of reducing losses if the trade does not operate. Without this, the trader will
quickly have economic problems, and most early traders will get this wrong and
discover that they will have to give up within the first six months of
starting. As it begins to feel like you’ve got it wrong, reducing losses may be
difficult for many prospective traders, but, especially with the leverage you
enjoy with CFDs, losses can work against you, and they can rise rapidly.
Hanging on to hope alone is not a feasible alternative.

Any
discretionary trading scheme must also allow the winners to make the most of
their earnings. Sometimes, especially after a losing streak, traders may feel
the urge to close their trade as quickly as they make a profit, so that they
can feel better about trading again. The best choice is to let your competitors
run, as part of the achievement of trading is that the winners are much bigger
than the losers. With this, a trailing stop can assist. The winners should be
larger than the losers, a good trading plan will review the risk / reward ratio
of any trade before it is made to ensure that the odds are favorable.

In
conclusion, before considering trading with a discretionary scheme, you should
closely examine where discretion is to be exercised and what effect this might
have on the outcomes. If this is important, your best course may be to learn
with the help of a mentor who has demonstrated his ability to work with a
specific scheme. With these components in mind, discretionary trading can be a
rewarding career.