Discretionary vs. Mechanical Trading: Which is Better?

02/09/2013 6:00 am EST


E-mini trader Matt Brown talks about why he employs a little bit of both styles in his trading and why he thinks it works better rather than just one or the other.

I am here with Matt Brown.  There is a running discussion, conversation, argument if you will, between discretionary traders and automatic or mechanical traders.  Matt, which one are you and why?

The answer is yes.  I am both.  eminijunkie was founded on the principles that you need to have a defined game plan and you need to have a method for attacking the market, and so what I have done is I developed a style and a system that has very specific entries, very specific exits, very specific targets but, based on that, I also have a discretionary side where we pull in various filters in the market such as advance-decline.  There are different things, different timeframes, to where you are not just taking every single signal that is coming along.  The signal is there, the trade is there, the setup is there, but you want the highest probability trades and so you use discretionary filtering to get to there.

Right.  Do you recommend that traders keep a set of rules next to their desk or their computer or somewhere out in the open or do you recommend that they attack the market intuitively?  What makes the most amount of sense for someone going into this market every day?

I think it is applied application knowledge, so you obviously have to have the rules set, and I provide that, you have to have a trading plan, I provide that, but then you have to actually put yourself in the market and live that plan and feel that stress and emotion that the market puts on you as soon as you pull that trigger.  With that, then you learn.  You are not going to have time in the heat of battle to refer to your notes.  You can have cheat sheets, that’s fine, but I think every trader needs to have an idea of what they are doing, learn, study, practice, and know as they go in the market because, when you are on the battlefield, it is no time to be looking at your notes.

Do you have an opinion about what is more important in this fast-paced market, the entries or the exits or managing the position or having a trading plan at the beginning?  For someone just looking at this market for the first time, what is most important for them to consider right now?

I think the easiest part is the entry. I can give you a very mechanical entry point and I can teach you how to look for the filters.  The problem is pulling the trigger on the entry and not hesitating so it is taking confidence and getting into the position but really it is once you are in, it is money management and letting your belief in the system work.  Most traders, and I’ve taught hundreds, up to thousands of traders around the world, and the number one thing I see is they have no problem learning a system, they have no problem going through the mechanics and the probabilities behind the system, but once in the trade, they freak out because they don’t have belief in the system so I think a lot of people step in too quickly before they have learned the system and practice and understand the real success it can have if you don’t mess with it.  Most traders just need to let the trade work once they are on, manage their money in such a way that they can pull a little bit of profits out but still have the trade work in their favor and they will have a lot more success.

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