There is a certain appeal to developing an automated trading system that requires you to act in a specific way every time market movement sets off a signal. The upside is that, for some traders, it is far easier to maintain a discipline about their trading when there is no discretion in the decision-making process. The downside is that In order to derive the full benefits of a profitable system, the trader must carry out the system’s instructions to the letter. 

Developing trading systems, however, is a major undertaking. While some traders are able to use off-the-shelf software programs to back-test historical data, many run into problems. What’s more, everyone seems to be searching for the Holy Grail of trading systems—one so powerful that it is 100% foolproof and yet so secret that it has not been discovered. (Good luck with that!)

Another problem with developing a trading system is that the available market data is often corrupted with inaccuracies.  Finally, and most significant of all, is that many developers tend to optimize their systems to the point where they are of no predictive value. Optimization occurs when the developer knowingly or unknowingly “fits” the market data to support a particular conclusion. 

Being a discretionary trader is no walk in the park either. Discretionary traders have rules to follow, just like their programmer counterparts. The distinction is that discretionary traders apply those rules based on their subjective understanding of each situation. From one trade to the next, there may be significant differences in how the trader’s strategy is implemented. This is not to imply that a discretionary trader can get away with lapses in discipline. Rather, it is because the trader’s decision-making process is subjective that discipline must be in the forefront at all times. 

Test your knowledge

ACCREDITED COURSE

Did you know that CME Institute classes can fulfill CFA and GARP continuing education requirements? Every CME Institute course can be self-reported in your CFA online CE tracker and select classes can be used for GARP credits. See which of our classes qualify for GARP credits here.

What did you think of this course?

To help us improve our education materials, please provide your feedback.

Extend your learning

Put your knowledge into practice with the Trading Simulator

Get hands on experience with the latest Trading Challenge

CME Group is the world’s leading derivatives marketplace. The company is comprised of four Designated Contract Markets (DCMs). 
Further information on each exchange's rules and product listings can be found by clicking on the links to CME, CBOT, NYMEX and COMEX.

© 2022 CME Group Inc. All rights reserved.