Traders often classify themselves as stock traders, or e-mini traders, or ETF traders, or Forex traders. But my experience as a professional trader for the past 7 years has convinced me that at a more basic level there are really just two types of traders - discretionary and mechanical.

The discretionary trader uses his or her experience and judgment to make trading decisions. The discretionary trader will usually have a documented trading plan with rules to guide or bound their trading decisions. But when it comes time to actually pull the trigger on an entry or an exit to a trade, they will evaluate the current market situation and apply the intuition they've developed over years of experience.

Conversely, systematic or mechanical traders have a rigid set of rules that precisely dictate their entry point, when they will exit the trade, and the size of the position. Systematic traders do not take into account anything in the market environment that is not explicitly covered in their rules. They take every trade. Period. Intuition, judgment, and experience do not enter into the equation. Systematic traders will also have a documented trading plan, but their rules will be so specific that they can be, and usually have been, programmed and back-tested. (Back-testing is the process of modeling a trading concept in a computer program and testing to see how it performed in past market environments).

Systematic trading may not be as fun, but it's much more consistent

Anyone who has traded in a discretionary manner knows the exhilaration of making a decision - of using your personal skills - and seeing the trade pay off big. Likewise, everyone who has traded discretionally - and I do mean everyone - has known the depressing lows of seeing 3, 4, or 5 trades in a row go against you even though you thought they were great setups. In the discretionary world, the highs are higher and the lows are lower. By comparison, the systematic style of trading is "boring." But, mechanical trading is usually much more consistent.

I spent the first half of my trading career as a discretionary day trader of stocks and e-minis. A little over three years ago I made the switch from discretionary to systematic trading. I loved trading with discretion. But, at the end of the day, my month-to-month performance was too inconsistent. At the same time my monthly bills and living expenses were very consistent. I had to do something to improve my consistency. I chose to become a systematic trader. Of course I still have good months and not-so-good months, but overall, my trading is much more reliable now.

Systematic trading is relatively new. The great traders we all read about from years past were all discretionary. But over the last decade mechanical trading has become the style-of-choice for an ever increasing number of traders. And, not only with individual traders. Today, seven of the top ten hedge funds trade systematically.

Emotion is a demon to trading

So which method is best? Which method should you choose? The answer is, of course, that it depends. Discretionary trading has the advantage of tapping the world's best computer - your brain. But the downside is that the computer supported by our necks is very susceptible to the virus of emotion. Whether you've been trading 1 week or multiple decades, emotion is a demon that must always be neutralized (it can never be eliminated). Mechanical trading offers a means to neutralize emotion.

If you are a consistently successful discretionary trader you should not change a thing. You have made it. The only reason for a successful discretionary trader to move to systematic trading would be so that they can automate or semi-automate their trading to free up time for other things.

If you are a new trader or a discretionary trader who is not consistently successful, then you may want to consider systematic trading. We all battle our emotions. Trading a system can provide the emotional stability needed to be successful.

Again, a trading system will not eliminate emotion. The goal is simply to neutralize emotions. In fact I guarantee that you will, at times, feel an over-whelming desire to do things that are completely outside your trading plan. But, if you are trading a mechanical system and you know that it has performed well historically and you trust that the historical backtested performance is accurate, you should have the ability to overcome your emotions.

For those of you that think you may be interested in mechanical trading there are many critical decisions to be made. Again, you need to take your time, understand your own personality, assess your risk tolerance, and explore the various options available in the world of systematic trading. Future entries on this blog will attempt to guide you through this process.

Rob Davenport is Chief Executive Market Testing Wizards. Rob served as an officer in the U.S. Navy before becoming an executive at Applied Materials. For the past 6 years he has been a full-time trader as well as a contract programmer and consultant in the areas of trading research and the backtesting of trading systems. His website is MarketTestingWizards.com.