What Is Discretionary Trading and How Does It Differ from Algorithmic Trading?
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Discretionary Trading
Discretionary trading is a traditional investment approach where human traders make buy and sell decisions based on their judgement, experience, and market analysis. These traders use a combination of fundamental and technical analysis to identify potential investment opportunities and execute trades manually.Key Characteristics of Discretionary Trading
- Human Judgment: Human traders rely on their intuition, experience, and market knowledge to make trading decisions.
- Flexibility: Traders can adapt to changing market conditions quickly and make real-time adjustments to their strategies.
- Qualitative Analysis: Traders often consider qualitative factors like company management, industry trends, and economic indicators in their decision-making process.
- Subjective Decisions: Human emotions and biases can influence trading decisions, which may lead to irrational behaviour.
Algorithmic Trading
Algorithmic trading, also known as algo-trading, involves the use of computer programs to execute trading strategies automatically. These algorithms are designed to identify trading opportunities, execute trades, and manage risk based on predefined rules and parameters. Key Characteristics of Algorithmic Trading- Computer Algorithms: Complex algorithms analyse market data and execute trades at high speed.
- Speed and Precision: Algorithmic trading can execute trades much faster than human traders, reducing the impact of market volatility.
- Reduced Emotional Bias: By eliminating human emotions, algorithms can make more rational and objective decisions.
- High-Frequency Trading (HFT): A subset of algorithmic trading that involves very high-speed trading of large quantities of securities.
How Discretionary and Algorithmic Trading Differ
| Feature | Discretionary Trading | Algorithmic Trading |
| Decision-Making | Human judgment | Computer algorithms |
| Execution Speed | Slower | Faster |
| Emotional Influence | Prone to emotional bias | Less susceptible to emotional bias |
| Flexibility | More flexible | Less flexible but can be reprogrammed |
| Cost | Lower implementation costs | Higher initial development and maintenance costs |
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