Traders can be classified into 2 types:
- Mechanical trader aka System Trader
This is what we will be focusing on mainly. A system trader is a one who trades when some or all specific conditions/rules are met.
The rules can vary from as simple as moving averages cross-overs or to as complex as using Fourier series. A trading system will make use of various tools of statistics to gauge its profitability over a period of time. This is what we call it as a, “system’s edge”.
Edge can be defined as a return on every 1$ risked. This defines the systems quality and its performance. There are more parameters to gauge a system but it will be discussed later.
2. Discretionary Trader
A discretionary trader is one who takes trade according to his/her judgement and experience. A discretionary trader can easily beat the returns of a system trader but the only catch here is that the discretionary trading is not sustainable in the long run. It will give way to emotions and change in market structure could ruin the whole process.
Given to the complexity of the Discretion involved it cannot be put into an algorithm or coded.