Mechanical and Discretionary Trading

If I were asked what is the main difference between the mechanical and discretionary trader, I'd answer: "The importance of context". For the mechanical trader it's a question of see ‘a setup and trigger' ('see a trade'), take a trade; the discretionary views a setup in its context.

Gold has served up a perfect example of what I mean.

One of my favourite setups is "breach of support, no follow through" where the next higher timeframe is an uptrend. Figure 1 shows that both the yearly and quarterly are in uptrends. Figure 2 shows a classic buy setup and trigger:

• The 18-day (monthly trend) comes to support zone.
• It then breaks below the prior low 1080.50 but holds above the Maximum Extension
• It has a bullish-conviction close above the Primary Buy Zone.

The price action would amount to a mechanical trader's dream buy setup - if I were a mechanical trader.

But as a discretionary trader, I take into consideration that there is an inverse relationship with the US$ and  direct relationship with the S&P - both suggest that there is more downside to come in Gold. (The US$ has more upside; the S&P more downside). So, I decide to pass on the trade.

Note that it doesn't matter to me that I know there is a possibility that Gold will rally and I may miss some of the move - well at least I know I won't mind too much (G). The reason is taking context into consideration has proved to produce a better bottom line for me.

FIGURE 1 13-Week Gold

FIGURE 2 18-Day Gold