The Game of Investing, Vol. 19
We’re looking at the pros and cons of systematic and discretionary trading.
When trying to determine what type of investor you are, choosing between a system-based or discretionary strategy is key.
Jamie McDonald, a former hedge fund trader turned markets educator, will walk us through this investor masterclass.
- “In the quest for sustainable market returns, investors need to find a trading style that they’re comfortable with,” says Jamie. “But if applied with discipline, both a discretionary and a system-based approach can be lucrative.”
In this issue, we’ll cover 3 things:
- The pros and cons of a rules-based trading strategy.
- Why some investors prefer a discretionary trading system.
- How to personalize a strategy that fits your unique goals and mindset.
Let’s get started.
Welcome to the Game
Welcome to The Game of Investing, a bi-weekly newsletter bringing you “aha” moments and actionable lessons from Real Vision experts. No matter your level of expertise, markets are tough — which is why we all have to put in the work. Ultimately, the game of investing is a competition with yourself. Our mission is to help you navigate the path to success. Prepare to level up.
Let’s get started.
LEVEL 1 — A System-based Approach
The distinction between systematic and discretionary trading really comes down to how you make decisions.
Systematic investing is a rules-based system where trades are executed based on predefined criteria.
- Systematic traders develop and follow set rules for entry and exits, position sizing, and risk management.
- Most systematic traders rely on quantitative analysis to set their rules and technical indicators — like VWAPs, stochastic oscillators, or DeMark signals — to identify opportunities.
“Many investors struggle controlling their impulses through sheer willpower alone,” says Jamie. “Executing trades based on objectivity can help you avoid the potential pitfalls of emotional and impulsive decision-making.”
In addition to built-in discipline, having a clearly defined system allows you to track, back-test, and refine your strategy over time.
On the flipside, the inflexibility of systematic investing means that traders must constantly refine their strategies to keep up with evolving markets.
LEVEL 2 — A Discretionary Approach
Discretionary investing involves making subjective decisions based on a trader’s experience and intuition.
- In this approach, it’s up to the individual to constantly monitor market news, charts, fundamental data, and macro trends to make informed decisions.
One major advantage Is traders have more freedom to use their intuition and can jump on opportunities that may not always fit a rules-based approach.
That advantage is also an argument against discretionary trading. For less experienced traders, the risk of confusion, analysis paralysis, and impulsive decision-making is considerably higher in discretionary trading.
- “At the end of the day, we all use discretion, and we all have rules,” says Jamie. “How strictly you follow those rules and the level of discretion you use is what really determines which end of the spectrum you fall on.”
For many new investors, a blend of systematic and discretionary strategies is a good starting point.
Level 3 — Personalized Trading
Ultimately, there is no one correct answer when trying to develop a trading framework. Each of us is unique — and what’s right for one trader could be wrong for another.
Finding the trading style that best fits you requires a deep level of honest reflection. What are your trading goals? What’s your time horizon? How hard are you willing to work? And what are your constraints?
- These are just a few of the questions every new investor must answer.
- You can read all about the basics of understanding our own trading psychology right here.
🔑 In the end, systematic trading is ideal for those who prefer disciplined objectivity, while discretionary trading appeals to those who enjoy the freedom of a more intuitive, research-based approach.
For more insights and tools that will help you grow as an investor, consider joining us as a Real Vision member. You can learn all about our various membership packages and current special discounts at this link right here.
Thanks for reading. Next time, for our 20th issue, we’ll recap everything we’ve learned so far in the Game of Investing.
See you then.
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