I traded on gut feel for three years and couldn’t make money consistently. Then I made one change, and I’ve traded that same way for more than two decades. That change was moving from discretionary to systematic trading.
If you’re reading this, you probably know the whiplash. Today you make some money. Tomorrow you give it all back, and more. Your brain keeps asking “is this the right decision?” and you spend hours on the charts every night hunting for tomorrow’s trades.
Discretionary vs systematic trading, the short answer: discretionary trading means you decide each trade yourself, on the day. Systematic trading means written rules decide every trade, and you test those rules on historical data before you risk a dollar. For most people with a job and a family, systematic trading is the more consistent and reliable way to reach their trading goals, because it can be tested, it gives the same trade every time, it takes 20 to 30 minutes a day and it shrinks the vote your emotions get.
This article covers what each approach really means, a simple test to find out which one you are, what the data says about traders who make their own calls, and the honest downsides of trading with rules. If you’d rather watch, the full video is below.
Click Here To Get the Free Stranger Test Checklist
What Is Discretionary Trading?
Discretionary trading is a style of trading where you decide each trade on the day you make it, using your own judgement. The rules live in your head. You might follow a checklist, and it might even be written down, but some part of it is subjective, so you have to make the final call on whether a stock is a buy or a sell.
A discretionary trader reads the chart, the news and the mood of the market, then decides. Two discretionary traders looking at the same chart can take opposite trades. The same trader looking at the same chart on two different days can do the same thing.
The problem with any approach that has subjectivity in it is that you can’t test it. A judgement call can’t be run back through 20 years of data, so you don’t find out whether your method makes money until after you’ve risked real money on it.
What Is Systematic Trading?
Systematic trading means written rules determine every trade. The rules look at the charts the same way and apply the same logic every time to generate your trading signals: what to buy, when to buy it, how much to buy, and when to sell. It’s also called mechanical trading or rules-based trading.
Because the rules are objective, they can be coded into software and backtested. You can see whether they made money in the past, through bull markets, sideways markets and bear markets, and judge whether they’re likely to keep making money in the future. You do that before you risk a dollar.
Systematic doesn’t have to mean fully automated. Plenty of systematic traders place their orders by hand at the end of the day. What makes it systematic is that the rules, not your mood, generate the signal. If you do want to hand the execution to a computer as well, that’s covered in automated trading systems.
Discretionary vs Systematic Trading: The Key Differences
| Discretionary trading | Systematic trading | |
|---|---|---|
| Who decides each trade | You, on the day | Written rules, decided in advance |
| Where the rules live | In your head, and they bend | On paper or in code |
| Can you test it first? | No – you find out with real money | Yes – backtested over decades of data |
| Same chart, same trade? | Depends how you feel | Every time |
| Time each day | Hours of chart analysis | 20 to 30 minutes, less if automated |
| Role of emotion | A vote on every decision | A much smaller vote |
| Can you combine several strategies? | Hard to do consistently | Yes – a portfolio of systems |
The Stranger Test: Are You Really a Systematic Trader?
Most traders think they’re more systematic than they are. Here’s a simple way to find out. Ask yourself one question:
Could a stranger trade your account from your notes and take exactly the same trades that you would take?
If your rules are written clearly enough that a stranger could produce exactly the same trades you produce, you can say you’re truly systematic. If not, you have subjective areas in your trading, and it’s going to be very hard to be consistent over the long term.
The test is useful because it doesn’t care how sophisticated your method sounds. “Buy when the trend looks strong” fails it. “Buy when the close is above the 200-day moving average and the 20-day rate of change is positive” passes it. A stranger can’t read your mind, and neither can a backtest. Writing that kind of rule down for every part of your trading is what a trading plan is for.
I built a free checklist that runs the Stranger Test across every part of your trading: your market, entry, exit, stop, position size, filters and when to stop trading a system. Every line you can’t fill in shows you where you’re still trading on gut feel.
Click Here To Get the Free Stranger Test Checklist
What Does the Data Say About Discretionary Traders?
The data on retail traders who make their own calls is grim. In Australia, ASIC’s review of the CFD market found that 68.42% of retail CFD clients realised a net loss in the 2024 financial year. That’s 133,674 of 195,386 retail clients across 50 licensees.
And the more often they traded, the more often they lost. Clients who averaged 0 to 5 open positions a month had a 64% loss rate. Clients who averaged more than 50 a month had a 76% loss rate.
Share of retail CFD clients with a realised net loss after fees in FY2024, by average open positions a month. Source: ASIC REP 828.
Day trading looks even worse over longer periods. A 2014 study of Taiwanese day traders by Barber, Lee, Liu and Odean, covering about 360,000 day traders a year from 1992 to 2006, found that only 13% to 15% made a profit after fees in a typical year, and under 1% were predictably and consistently profitable.
One honest caveat. These studies don’t label anyone discretionary or systematic. They measure retail traders, and the vast majority of retail traders make trade-by-trade discretionary calls. So the data doesn’t prove systematic traders do better. What it shows is that the default way most people trade loses money for most of them, and that trading more often makes it worse. You can dig into every study behind these numbers in what percentage of traders lose money.
My Three Years as a Discretionary Trader
For my first three years, I was a discretionary trader, and my problem was that it was never clear which setups made money and which ones didn’t. I spent hours every night looking at charts, drawing trend lines, analysing indicators and trying to come up with the perfect trades for the next day.
What I realised years later was that all of that was me trying to control the market. Drawing lines, picking entry and exit points, trying to outsmart what the market was doing. None of it could be tested, so I had no idea which parts of it were working.
Once I moved to backtested rules, I could see exactly which ideas made money and which didn’t. I decided never again to take a trade that wasn’t generated by a backtested system, and I’ve traded that way for more than 20 years since.
What a Self-Driving Car Taught Me About Trading Rules
My wife and I recently test drove a Tesla because we wanted to try the Full Self-Driving. When most people think about a car driving itself, their control-freak nature kicks in: “Oh no, I couldn’t possibly let a car drive for me.”
I felt a bit that way too. We pulled out of the car park, drove onto the main road and switched it on, and I had an immediate freak-out at letting go of control. A moment later I relaxed, because the car was doing a fantastic job. It followed the road rules. It indicated where it was supposed to indicate, stopped where it was supposed to stop, gave way when it needed to and accelerated when it needed to.
It was following a proven process, tested over millions of driving hours. A trading system works the same way. The hardest part of becoming a systematic trader is the same reflex I had in that car: handing control of the decisions to a tested process instead of your own judgement in the moment. Once you’ve seen the process work, you stop fighting it. This is the core idea behind most of what we cover in trading psychology.
Who Blows Up Their Trading Account?
In 12-plus years of teaching traders, I’ve seen a very consistent pattern. The number of truly systematic traders who blow up their account is extremely low. The number of discretionary traders who blow up their account is much, much higher.
People blow up their accounts because they make irrational, illogical or emotionally driven decisions. They risk too much. They take on too much leverage for fear of missing out. Greed drives their decisions, the emotion takes control, and they lose huge amounts of money.
Systematic traders follow a process, and when you follow a process you do it consistently, which makes it much harder to blow up your account. In all my time working with traders, the only people I’ve seen blow up their accounts were either discretionary traders, or systematic traders who were far too leveraged and aggressive with their position sizing.
Why Do Rules Win for Most Traders?
Rules win for most traders for four reasons: you can test them first, they’re consistent, they fit a working life and they give your emotions a smaller vote.
- You can test them before you risk your money. Objective rules with no discretion can be coded and backtested over decades of data, through bull, sideways and bear markets, to check that they’re profitable and that they’ll keep your account alive. Learn the process in how to backtest a trading strategy.
- Consistency. The same inputs give the same signals and the same trades every single time.
- Time. Systematic trading fits into a working life. It takes 20 to 30 minutes a day, and even less if you’re fully automated. No more hours on the charts every night.
- Emotion. Your emotions get a much smaller vote, because you’re not making every decision yourself. The rules tell you objectively: this is a buy, this is a sell.
What Does a Portfolio of Trading Systems Look Like?
There’s one more advantage that discretionary trading simply can’t match: you can combine several good strategies into one portfolio. Here’s what that looks like in practice.
Hypothetical backtested results, January 2010 to October 2026, including slippage and commissions. Past performance is not a reliable indicator of future performance.
This is the US Edge System Portfolio, seven different trading strategies on the US market, backtested in RealTest since 2010. The combined portfolio shows a 20% compound annual return with a 17% maximum drawdown, including slippage and commissions.
The coloured lines along the bottom are the individual trading systems, each with an equal weighting. The grey area is the combined result at the portfolio level. Each system makes money in different market conditions, so when one is struggling another is often doing well, and the combined equity curve is far smoother than any single system on its own. That’s the real power of systematic trading, and it’s explained in detail in portfolio of trading systems.
What Are the Downsides of Systematic Trading?
Systems can fail too, and anyone who tells you otherwise is selling something. Here are the main ways systematic trading goes wrong.
- Copying someone else’s rules without testing them. Early in my systematic trading, I had a system that took 27 losing trades in a row. I’d copied a system from a course, and its stops were far too tight. That streak is what pushed me into backtesting properly.
- Curve fitting. If you over-optimise a strategy to fit historical data, it looks brilliant in the backtest and falls apart in live trading. Trading system optimisation covers how to avoid it.
- Trading a system with a drawdown you can’t stomach. If the drawdown is bigger than your tolerance, you’ll get nervous and quit in the middle of a dip, right before the recovery you needed.
A system only removes emotion if you follow it consistently. To do that, you need confidence in it, and that confidence comes from backtesting your strategy through all sorts of market conditions until you know how it behaves and you’re comfortable with it.
Do Discretionary Traders Make More Money?
You’ve probably heard that discretionary traders make the most money. In a very small number of cases, that’s true: there are professionals who trade with a discretionary approach and make huge returns. They usually trade full time, with enormous feedback loops and years of screen time.
For the vast majority of people, that’s never going to happen. There’s always a small number of unicorns with a natural, innate feel for the market, but most people make very bad discretionary traders. If you have a job, a family and limited hours, systematic trading is a much more consistent and reliable way to get to your trading goals. Even the most famous quant fund in history, built by Jim Simons, ran on rules rather than gut feel.
Which One Are You? Take the 3-Question Test
Answer these three questions honestly:
- Could a stranger take your exact trades from your notes?
- Do you know the win rate and the expectancy of every setup you trade?
- If the same setup appears tomorrow, would you take exactly the same trade every single time?
If you answered no to any of them, you still have discretion in that area of your trading. Start by writing your rules down so you can see them in black and white. The gaps will be obvious. Then fill in the blanks until you have a complete set of rules that tells you exactly what to do and exactly when to do it.
The Verdict: Discretionary or Systematic?
The sad reality is that the majority of retail traders lose money. We can see it in the statistics. And the majority of retail traders are also discretionary and subjective in the way they approach the market.
A proven, tested process drives far better results than your emotions do. That’s why you need a system to drive your trading.
Find Out Where You’re Still Trading on Gut Feel
The free Stranger Test checklist walks through every part of your trading and shows you exactly which rules a stranger couldn’t follow. Fill the gaps and you have the start of a testable trading system.
When you’re ready to go from written rules to a full portfolio of backtested systems, the Trader Success System takes you through it step by step, from your first rules to trading a portfolio of systems that fits around your life.
Remember – you are only one trading system away!
Frequently Asked Questions
What is the difference between discretionary and systematic trading?
In discretionary trading, you decide each trade yourself on the day, using your judgement. In systematic trading, written rules decide every trade in advance, and those rules can be backtested on historical data before you risk money. The key difference is testability: a judgement call can’t be tested, a rule can.
What is a discretionary trader?
A discretionary trader makes the final decision on every trade based on their own reading of the chart, the news and the market. Even if they use a checklist, some part of it is subjective, so two discretionary traders can look at the same chart and take opposite trades.
Is systematic trading better than discretionary trading?
For most retail traders, yes. Systematic trading can be tested before you risk money, gives the same trade from the same inputs every time, takes 20 to 30 minutes a day and gives your emotions a much smaller vote. A small number of full-time professionals succeed with discretion, but that’s the exception.
Can you backtest discretionary trading?
Not reliably. Backtesting needs objective rules that a computer can apply the same way to every bar of historical data. Any part of a method that depends on judgement can’t be coded, so it can’t be tested. That’s why discretionary traders only find out whether their method works after they’ve risked real money.
Is mechanical trading the same as systematic trading?
Yes. Mechanical trading, rules-based trading and systematic trading all describe the same thing: trading where predefined rules generate every buy and sell signal. A systematic trader can still place orders by hand; what matters is that the rules make the decisions.
How much time does systematic trading take?
Trading end-of-day systems typically takes 20 to 30 minutes a day, and even less if the orders are automated. Compare that with the hours of chart analysis each night that most discretionary traders put in.
How do I know if I’m a discretionary trader?
Use the Stranger Test: could a stranger trade your account from your notes and take exactly the same trades you would? If the answer is no for any part of your trading, such as your entry, exit, stop or position size, that part is still discretionary.
