Discretionary and consistent? How?

I’ve been asked a few variations of the same interesting question recently. Here are a few examples:

The one thing I keep struggling with is finding an edge I can use in a disciplined and consistent way. How do you define an edge? To me an edge can’t be discretionary; an edge can only be defined by a set of rules. Otherwise it can’t be applied in a disciplined and consistent way, am I right?

Or, as Markus asked in the comments to a recent post:

As an avid reader of your posts and your book it strikes me how often you mention the importance of discipline and consistency. Does this mean that your trading is more rule based than discretionary? Or are some parts… more rule based and other parts… more discretionary?
In my opinion, consistency is only possible if you have rules, but on the other hand it is also important to be adaptive and flexible and this might sometimes challenge consistency.

So the question really comes down to something like “how can we be discretionary and consistent at the same time?” Let’s think, first, about what “discretionary” means.

082912_1634_Askyourself1.jpgI think many people would categorize trading approaches across a spectrum from discretionary to systematic. A purely systematic trader has a set of rules and simply always applies those rules–a computer could do it, probably better than a human. On the other extreme, imagine a purely discretionary trader who simply buys or sells whatever he wants based on his opinion or mood at the time with no consistency (1 share or 1,000,00 shares; holding 1 minute or 10 years; etc.) at all. The problem in this (flawed) classification system comes from a misunderstanding of what it means to be a discretionary trader.

To my way of thinking, discretionary trading simply means that we allow some degree of human intuition into the trading process. This does not mean that trading becomes unstructured and undisciplined. On the contrary, the application of discretion can be highly structured. Here are some ways this might be done:

  • First, specify where discretion is allowed. In choosing entries only? Sizing? Trade management? Stop location? Getting out early? Doubling up? All of the above? Depending on your trading methodology, some of these choices may make more sense than others.
  • Have a rule that specifies what you will do if intuition and other rules are strongly in conflict. This requires some thought because it may be different at different points in the process. For instance, if your intuition is to skip an entry specified by your system, perhaps that would not be allowed, but if you are inclined to exit a trade early, that might be ok.
  • Note the words used here: “specify”, “have a rule”, etc. This means that you have rules, in advance, that say what you will and will not do in the market.

That last point is the key to consistency. We do not have to remove all human input from the trading process. In fact, we can’t. For instance, a purely systematic trader follows a set of rules, but where did those rules come from? In most cases, from some type of statistical or scientifically informed (hopefully) research process, but, even here, things are not absolute. Research involves decisions, and those decisions are made, at least on some level, by humans. Why some markets and not others? Why certain parameters? Why was this particular approach to the data explored in the first place? Why did we choose to look at certain data sets and exclude others? Even more importantly, someone (or something–it could be a “meta system”) is probably monitoring our systematic guy. If market conditions change in some way we don’t understand, his rigid set of rules may no longer work, and, at some point, he will get the proverbial (and perhaps metaphorical) tap on the shoulder and be pulled out of the game. Following that event, there’s a good chance that humans (again, using some intuition and discretion) may look at his rule set, refine it in the context of recent data, and might send him in to play again. Even in this most rigid systematic approach, human discretion and intuition dance in the margins. The key is that discretion can be structured and disciplined, just as any other input to the trading process.

I will agree that exact adherence to bullet point rules is easier than incorporating discretion into your trading. It takes a lot of experience to use discretionary inputs in a way that is not unduly influenced by emotion. (Note: removing emotion from trading should not be a goal.) Being consistent and being disciplined simply means we follow a set of rules with consistency, and those rules certainly can include an element of discretion.


Adam Grimes has over two decades of experience in the industry as a trader, analyst and system developer. The author of a best-selling trading book, he has traded for his own account, for a top prop firm, and spent several years at the New York Mercantile Exchange. He focuses on the intersection of quantitative analysis and discretionary trading, and has a talent for teaching and helping traders find their own way in the market.

This Post Has One Comment

  1. Markus

    Adam, thank you a lot for your answers. I will have to add some points to my trading plan. Especially helpful has been this suggestion:
    “Have a rule that specifies what you will do if intuition and other rules are strongly in conflict.”


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