The difference in systems trading vs discretionary trading is who makes the decision. A systems trader follows fixed, written rules for entry, stop, exit and size; a discretionary trader reads each situation and decides in the moment. Below we compare the two, keep our original 2017 post on removing the human factor, and explain the hybrid we use.
Quick answer: what is the difference between systems and discretionary trading?
Systems trading means every decision comes from written rules that someone else could apply to the same chart and get the same trade. Discretionary trading relies on the trader’s judgement of each situation. Systems are easier to test and repeat; discretion adapts faster but is harder to measure. Many traders combine fixed rules with limited, logged judgement.
Systems trading vs discretionary trading at a glance
A system needs judgement when it is designed; discretion needs rules to stop it drifting. The table shows where each tends to help and hurt.
| Factor | Systems trading | Discretionary trading |
|---|---|---|
| Who decides | The written rules | The trader, trade by trade |
| Consistency | High, if the rules are followed | Varies with mood and fatigue |
| Testing | Can be backtested | Hard to test fairly |
| Adapting to news | Slow: rules must be changed | Fast |
| Main risk | Overfitting, then abandoning it | Emotion and inconsistency |
Removing the human factor: our October 2017 post
We first published this post in October 2017, arguing for rules over gut feeling. The surviving original words are below. We have removed return figures, an old trade-copying offer and link prompts that no longer work.
Almost every career is at a threat of having people replaced by machines. I know this was one of my main worries whilst at university; studying a degree steeped in logic, how long was it before the human error I was capable of made what I learned redundant by a machine that could do it better?
AI and humanity do not need to be mutually exclusive, especially in trading. What gets most traders is the inability to separate ‘gut feeling’ and subjective opinion from their trading decisions, sometimes with disastrous results.
What is System Trading?
A trading system is a set of rules that you follow to enter trades, place stop losses, and exit trades. A trading system can be as simple or complex as you require, but it is important to remember that just because a trading system is complex does not mean it is better than a simple one.
Why doesn’t everyone do this?
Rule-based trading gives a huge advantage to a trader by taking away any subjectivity to their trading. There should be no decisions made on emotions or ‘gut instinct’. The result is that you should be trading like a machine – disciplined and consistent. Most traders, however, begin to panic when they hit a small drawdown and start bending the rules or no longer following them, thus undermining the entire purpose of systems trading.
Start Simple
The first system I remember testing was extremely straightforward, and turned me into a profitable trader almost overnight. Using systems revolutionised my trading by removing all emotion and subjectivity from my decisions, which can often be the downfall of even the best traders. Start with the basic indicators , like moving averages, and gradually build a strategy around that.
Optimise
Once you have a system, the act of placing trades only takes a few minutes (only 15 minutes for me) and can even be automated with some brokers.
Reading the 2017 post today
“Almost overnight” was one trader’s experience in 2017, not something a new system will do for you. Most systems need months of testing, and even a sound one has losing runs. Our guide on how to develop your own trading system step by step covers that testing.
Why rules help: removing emotion with systematic trading
A system does not remove emotion; it moves it. You no longer agonise over each entry, but you still have to decide whether to follow the rules after three losses in a row. That is the moment the 2017 post describes, and it is where most systems fail.
Research on forecasting points the same way. In experiments by Dietvorst, Simmons and Massey on algorithm aversion, people lost confidence in an algorithm more quickly than in a human after seeing both make the same mistakes, even when the algorithm forecast better. The study was not about trading, but the pattern is familiar: a few losses and the rules get blamed, while our own bad calls get forgiven.
The practical defence is to decide before the session, not during it. Our daily routine for stopping emotional trading sets that out, and the five psychological hurdles traders face explain why the urge to override is so strong.
Where discretion still earns its place
Rules rarely capture a central bank surprise or a thin holiday session well, and a discretionary trader can step aside. That flexibility is real, but it only helps if it is used rarely and on purpose.
The hybrid we use
We trade price action with fixed filters, a fixed trigger and fixed risk, and allow judgement only on whether conditions are fit to trade at all. Our filters and triggers trade entry checklist is the rules part.
- Fix what can be fixed. Entry conditions, stop placement, targets and risk per trade are written rules.
- Limit discretion to one job. Skipping a trade is allowed; inventing one, moving a stop or doubling size is not.
- Log every override. Tag it in your journal with the reason.
- Review the tags. After 30 or more overrides, compare them with the trades the rules would have taken.
If your overrides do worse than the rules, your discretion is costing you money. Our guide to a trading journal for beginners shows how to record them.
Worked example: the same rules, followed and overridden
Example: two hypothetical traders each start with £5,000 and use the same rules, risking 1% per trade, which is £50. Over 20 trades the rules produce 8 winners averaging £100 and 12 losers of £50, a net gain of £200 before costs.
Trader A takes all 20 trades. Trader B loses the first four, decides the system has stopped working and skips the next six, which include three of the winners.
Trader B’s 14 trades give 5 winners (£500) and 9 losers (£450), a net gain of £50. Same rules, a quarter of the result, and Trader B has also learned nothing about whether the system works. The numbers are illustrative; if these were CFDs or spread bets, leverage means a gap past a stop could lose more than the planned £50.
Which approach suits you?
Choose by temperament and time, not by which sounds cleverer. Our guide to matching your personality to a trading method goes further.
- Lean systematic if you are new, have limited screen time, or find you second-guess every trade.
- Allow more discretion only after you have a tested rule set and a journal that shows your judgement adds something.
- Either way, write the rules down inside a trading plan with a fill-in template.
Common mistakes
- Calling gut feeling “discretion”. Real discretion follows a stated reason you can review later.
- Abandoning a system in a normal drawdown. Decide in advance what loss would make you stop, based on testing.
- Overfitting. Adding rules until the past looks perfect makes the future less certain.
- Thinking systems need code. A price action system can be written on paper and tested by hand.
Frequently asked questions
Is systematic trading better than discretionary trading?
Neither is better in itself. Systems are easier to test and repeat, while discretion adapts faster; what matters is whether your approach has been measured over a fair sample of trades.
Which is better for beginners?
We think beginners learn faster with written rules, because every result can be traced back to a rule. Discretion makes more sense once you have a journal to judge it by.
Is a trading system the same as automated trading?
No. A system is a set of rules you can apply by hand; automation is just one way to execute them.
Is price action trading discretionary?
It can be either. Reading price action loosely is discretionary, but writing the setups as yes-or-no filters and a trigger turns it into a system.
Next steps
List which of your decisions are rules and which are judgement calls, then tag the judgement calls in your journal. When you are ready to build or tighten your rules, follow our step-by-step guide to building and testing a trading system.
A filters and trigger process and a rules-based risk model are both part of our price action trading course, and the basics section is free to start.
This article is for education only and is not financial advice. Trading leveraged products such as CFDs and spread bets carries a high risk of losing money.
