Discretionary versus mechanical e-mini trading

Similarly as many other trading vehicles, e-mini futures can be traded in two significantly different ways: through mechanical systems and by using discretionary methods. The difference between the two is not always quite well understood by beginning e-mini traders.

The poor quality literature on the subject, frequently produced by the marketers with dubious expertise in this field, only adds to this confusion. For instance, one common misunderstanding among beginners to e-mini trading is that discretionary trading is simply like mechanical trading except that the trader is allowed to override the mechanical system rules.

Well, that is definitely not what pure discretionary trading is about and it is not very wise to approach it this way. This type of trading is just mechanical trading with discretion and when done properly, may, in fact, be more mechanical than one would think it is. While this may sound paradoxical, I will explain why it may be so below.

Let us now elaborate a bit on the difference in question.

In mechanical trading you take trades as called by your mechanical system, while in discretionary trading you choose the best trades from those suggested by your trading methodology, which is a set of strategies or methods. I could also put it this way: mechanical traders are like gatherers (they basically collect what the system gives them), while discretionary traders are definitely hunters (they go after the best, juiciest piece of meat, and pursue it aggressively). One more way to view the difference between the two is via the analogy of big government vs small government. The former comes with many strict rules and tends to be rather inefficient, while the latter involves relatively few rules that are flexible, which makes it more efficient than the former. Yet another way to delineate the difference between the two trading styles is this: in mechanical trading, your systems own you, in discretionary trading you own your methods.

Finally, while purely mechanical trading can be suitable to virtually everyone and it takes little time and commitment to master it, it is discretionary trading that most small, good traders make a living with because unless you can trade a bigger size and diversify across different mechanical systems and different markets, you are unlikely to make a steady living trading in a purely mechanical way. Yet, you can do this trading in a discretionary manner. You can make a steady decent living trading one market only with just 1-3 contracts, but to this end you need to master the art of discretionary trading. And by steady I don't mean over the period of some 6 months, but rather 6 years and beyond.

The mechanical aspect of e-mini trading, or trading in general, emphasizes rules, all of which are equally important and cannot be overridden. The mechanical trading system is just a bunch of rules. Contrary to that, e-mini trading that relies on discretion emphasizes reading the market. The better you read the market the more likely you are to make money. It's where the real edge is and you can train yourself to do it well. It may be easier than you think, but it takes a different attitude and a bit more of commitment than what is needed to master trading e-minis in a purely mechanical fashion.

The rules are less important in discretionary e-mini trading and there are only a handful of them. One can even say that there is only one: "don't do stupid things." In discretionary trading of e-mini futures, you basically need to adhere to this one simple rule, although you need to know what doing stupid things means. One example of that is not respecting your maximum stop-loss, another not reversing your position quickly, if you think you are on the wrong side of the market. The other rules, such as entry and exit rules, do exist, but they are negotiable and flexible, hardly the type of rigid rules that exist in mechanical e-mini trading. One should probably rather call them hints than rules, to avoid thinking of them the same way as in mechanical e-mini trading.

Let me now tell you why mechanical trading with discretion is often even more mechanical. It's because by adding the discretion to the purely mechanical approach to trading, you basically define which mechanical rules can be overridden and how. In other words, you create more rules.

This may work for some, but be rather careful about it if you are new to trading e-mini markets, because too often discretion is used by unscrupulous marketers to claim profits their mechanical trading systems would have never been able to produce. However, once they add discretion to them, magical things happen. The thing is that unless these people can produce real time evidence that their discretion-aided approach works, even only for them, and that does not yet mean it will work for you, their claims are just not good enough to be trusted.