How to bring objectivity to your trading

Discretionary vs. objective trading

Before we get into the actual specifics of a strategy with objective assumptions, let's explain what the difference between objective and discretionary trading approaches actually is. Many of you may not realize it, but subjectivity is a pretty big deal in trading.
 

• Discretionary trading is the process of opening and closing orders based on feelings, i.e. intuition and faith in our experience, ability to think comprehensively, continuously draw conclusions and react promptly to changes. It is trading based on a subjective picture of the market. In this case, traders make decisions based on their experience of the market and, unfortunately, often on the basis of their intuition, which is often just emotions in disguise.
  
  There may be nothing wrong with this at all, if such traders are resilient to stressful situations and have really "experienced" the markets over the years. It's just that if this is not the case, using the discretionary system may be inappropriate. As we know, working under pressure leads to rash and often wrong decisions. It is not uncommon for traders using discretionary trading strategies to open positions too early or too late.
   

• Objective trading is based on a set of conditions or rules, the fulfilment of which is not subject to the subjective judgement of the trader. The Price Action + MACD strategy by foreign trader Dariusz Darga, which we have translated exclusively for Czech traders and published as an ebook, falls into this style of trading. It is built in such a way that traders have to answer 3 questions before entering the market, the answer to which they can find in the chart and data. If they answer "yes" three times, they can open a position.
  
  For objective strategies, it is simply not possible to answer "probably yes" or "probably no". If such a situation occurred and the trader had doubts, it is not an objective strategy.

Subjective assumption, objective assumption - examples

So let's see which of the frequently used trading techniques or indicators are based on subjective assumptions and which are based on objective ones.
 

Subjective assumption

For example, Fibonacci levels, Elliott waves or trend line marking are based on subjective assumptions. They give traders freedom in terms of interpreting what is happening on the chart.
 

Fibo levels

At different time intervals there are Fibo levels at different places. The trader has to decide which levels to consider based on his experience and knowledge.

A very subjective element of the strategy

Which levels will you consider to meet your strategic assumptions? The ones on D1, or the ones on H4?

Trend lines

Trend lines can be drawn in any way, it's up to the trader. Which points in the chart does he consider important and which does he not notice or consider important? Subjectivity is quite evident here. The trend lines here may complement the strategy, but they should not be decisive when opening a trading position.

Elliot waves

Which wave is the one that opens the order? Is it the highest, or maybe the lowest? Constructing a strategy based on Elliot waves leads to difficult, subjective decisions.

Objective assumptions

Breakout from inner or outer pin bar; emergence of divergence of S/R levels - confirmed by repeated testing; breakout from Bollinger bands. If the strategy's premise is a breakout from an inside bar, then the assessment of whether the price is outside its range is purely objective. There is no room for discretion or subjectivity - price is either outside the inside bar or not.

If there is an S/R level in the strategy estimates that has been repeatedly tested, then there is nothing to consider. The price has returned to that level and the retesting has either come true or it has not. Either way, this level will play no role in the trade decision.

Divergence, Over Balance - is or is not - simple and straightforward.

Breakout

A breakout of an inside (or outside) bar is confirmed if the breakout candle closes outside the patterna area. No subjective assumptions, just straight fact.

Divergence

When the price moves in the opposite direction to the indicator (MACD), we call this situation divergent. The signal that tells us that a divergence has formed is a change in direction on the histogram - in this case, a change in color from green to red.

S/R levels

If the S/R level is thoroughly tested after a breakout, it can be considered an objective component of the strategy.