There are two ways to face the same market. In the first, a person sits in front of the screen, watches the price move and decides, in real time, when to get in and when to get out. In the second, that same person decides all of that beforehand, turns it into rules, tests them against years of history and lets a computer carry them out.
The first is called discretionary trading. The second, quantitative or algorithmic trading: pick whichever name you like. The technical difference is obvious. The human difference is far less so, and it's the one that really decides who lasts in this business.
Three ways to trade by hand
Discretionary trading covers very different styles, and they differ above all in how long each trade lasts:
| Style | How long a trade lasts | Time in front of the screen | Decisions per day |
|---|---|---|---|
| Scalping | Seconds to a few minutes | The whole session, eyes glued to it | Dozens |
| Swing trading | Several days to a few weeks | A while each day | A few |
| Long term | Months or years | Every now and then | Hardly any |
As a rule, trading by hand takes a lot of screen time. And the more decisions there are to make, and the faster, the more room there is for what comes next.
The seven emotions that trade with you
Anyone who has traded in real time knows them. They don't show up on any chart, but they sign plenty of orders:
Their intensity isn't the same in every style. In scalping they peak, because decisions come one after another with very little time to think. They ease off as we move towards swing trading and the long term, where there's time to breathe between one decision and the next. But they never fully go away: a long-term position that drops 30% will keep you up at night too.
What changes in quantitative trading
In quantitative trading, the hard work happens beforehand. During research and development, the trader plans how the strategy will behave in every situation: when it enters, when it exits, how much it risks, what it does if the market turns against it. And they check it against years of data before putting anything on the line.
Once that's settled, it doesn't matter whether it trades on a tick chart, a 5-minute, 4-hour, daily or weekly one. The computer will carry out, precisely and without deviation, every order that follows from the strategy we have defined. It doesn't hesitate, it doesn't get tired, it doesn't have bad days and it doesn't move the stop because "this time it's different".
Side by side
| Discretionary | Quantitative | |
|---|---|---|
| When decisions are made | In the moment, with the price moving | Beforehand, calmly and with data |
| Who executes | You | The computer, the same way every time |
| Screen time | A lot, especially in the short term | Research and monitoring |
| Can it be tested first? | Hard: every decision is slightly different | Yes: the same rules over years of history |
| Its biggest danger | Emotions during execution | Overfitting, and not sticking to the plan |
So which one is better?
There are excellent discretionary traders, with years of experience and iron discipline. But they are the exception, and almost all of them are exceptional precisely because they trade with very clear rules, even if those rules live in their heads.
Quantitative trading doesn't guarantee profits: a bad strategy executed perfectly is still a bad strategy. What it does is separate the time for thinking from the time for acting. The important decisions are made with a cool head, tested against data, and after that nobody, not even you on a bad day, can skip them.
In discretionary trading, your emotions trade alongside you every day. In quantitative trading, they only get a say while you design. And that's what data is for.
Test your ideas before you risk your money
AniQuant turns your rules into backtests, validates them out of sample and shows you what drawdowns to expect. Try it free for 14 days.
Download AniQuantFounder of AniSoft (software since 1995) and creator of AniQuant. Writes about honest backtesting, strategy validation and the mistakes that cost money.