Making money as a discretionary trader is only part of the job. 

Keeping that wealth is the other part. 

In order to keep money taken from the market, every trader needs to have an edge. And the greatest edge in discretionary trading is discretion. What does this mean exactly? Discretion is the art of identifying triggers for when to apply a trading system and, more importantly, knowing when not to. That’s what this article is all about – how discretionary trading works and what discretion really means for a trader. 

Developing a Discretionary Trading System

In the beginning, the most important step for any trader is to start doing something. It doesn’t really matter what system they trade with because the goal is to develop a resume for themselves and cultivate an intuition for trading. It’s impossible to have this without just taking trades. Also, this is why small position sizes as a beginner are a great guideline. 

New traders will often start applying discretion to their trading based on experiences shared by other traders. But eventually they will accrue enough experience to perform their own mental or statistical backtesting. But forward testing is the only thing that will truly provide value. To start forward testing, a trader has to pick a system and start using it. 

There are no right or wrong choices here. Any set of indicators or technical analysis can be used. 

Why is that true? 

Any high school student can watch a video explaining an indicator and understand how to use it. An edge is not understanding what an indicator is per se. Real money is made exactly when that trading tool is useful and when it isn’t. That level of tacit knowledge only comes from spending time in the market, observing how indicators perform, and losing some money (hopefully small amounts) in the process as a sort of tuition. 

Ignoring a Discretionary Trading System

Intuition, experience and, yes, actual discretion are key to success as a discretionary trader. Understanding context for when a system works and when it doesn’t is the difference between keeping profits and giving them back to the market. This philosophy allows traders to apply essential context to the structures, indicators, or other signals they use to identify opportunities in the market. 

In short, that's the main point of this article. In order to make any of the stuff that is seen on YouTube, Twitter, Discord, etc. work, a trader needs to know when not to use it, rather than when to actually use it.

Anyone can buy a breakout of a moving average or short a bearish divergence. But not everyone can execute those trades consistently over time with relevance to when a divergence is “real” or should be ignored, what context from the market is creating that signal, and why that signal should be actioned no with greater (or lesser) confidence than a previous signal. 

Like Steve Jobs said, “Deciding what not to do is as important as deciding what to do.” 

Anyone who is just starting their journey as a trader should absolutely focus on identifying things they should not be doing instead of trying to find all the things they think they should do. That distinction is crucial, and it will likely have better results. 

My Experience as a Discretionary Trader

My system is adept for strong trends, and it’s quite simple. At its core are three working parts.

• My interpretation of market structure
• My perspective on the current trend
• My identification of horizontal levels (usually grey boxes)

When market structure is intact and moving averages are holding without any key levels being lost, I have no reason to be bearish. When the opposite is true, I have no reason to be bullish. And yes, this means by definition that I will be bullish at the top. I respect my system and it rewards me.

It's easy for anyone to convince themselves of their own genius and neglect the fact that success stems from a well-defined system and the market environment itself during the time of a trade.

That’s when traders give their money back to the market.

Respecting a successful system and having the patience and discipline to walk away when it’s not time to use that system is how a discretionary trader outperforms the market and other traders. 

Any trader who is able to acknowledge when their system is not applicable should inherently be able to assess when it is useful. But the reverse is not true.

That is the essence of discretionary trading. 

The ideas expressed in this article are a synthesized adaptation of a YouTube video produced by the author and a Twitter thread written by the author.