Table of Contents
The primary difference between objective and subjective trading lies solely in the perception and psychology of traders. In objective trading, the trader's decision to buy or sell a stock is based on pre-determined rules, principles, and reasoning. However, in subjective trading, traders rely on general guidelines, intuition, gut instinct, personal opinion, experience, and judgment regarding the anticipated change in security prices. In short, facts and reasons drive objective traders, while feelings and emotions become the guiding light for subjective traders.
Key Takeaways
Trading of securities in the financial market involves traders who follow proven strategies and plan for timing the market to make their buying and selling decisions accordingly. It is the objective style of trading. However, other types of traders believe in following their instincts rather than the rules; they are subjective traders.
Let us now go through the detailed distinctions between the objective and subjective trading styles:
| Basis | Objective Trading | Subjective Trading |
|---|---|---|
| 1. Meaning | Objective trading emphasizes following a trading plan or pre-defined set of rules for entry, exit, market timing, and other types of orders in the financial market. | Subjective or intuitive trading is when traders follow their beliefs, emotions, judgments, and experiences when buying and selling securities in the financial market. |
| 2. Based on | Trading plans, set rules, principles, and reasoning | Intuition, grit, personal belief, emotions, gut feeling and experience |
| 3. Decision making | Involves making rational decisions by applying proven strategies | Involves taking intuitive and emotional decisions based on the business news bulletin and social media updates |
| 4. Biases | Unbiased style of trading with proven results | Biased form of trading based on the trader's gut feeling |
| 5. Trader’s perception | Here, traders follow the experts' opinions and rules. | In this case, traders are highly active and make their way through trial and error. |
| 6. Traders’ qualities | Objective trading is where traders are disciplined, play safe, and are contented and patient. | Subjective traders are risk-takers, courageous and self-confident. |
| 7. Market entry or exit | In objective trading, a trader enters the market by taking a profit order and exits the trade through a stop loss order only when their criteria are fulfilled per the trading plan. | A subjective trader makes the following decisions:
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| 8. Risk Involvement | It involves low risk since the trading strategies and rules are tested and proven over the years. | It involves high risk since the strategies adopted for entry, exit, and other orders are influenced by the trader's beliefs, feelings, and emotions. |
| 9. Market corrections and pullbacks | In maximum cases, objective trading strategies efficiently identify certain stock price movements driven by market corrections and pullbacks. | Subjective traders often overlook a certain price change forced by a pullback or market correction and, thus, usually make a wrong decision. |
| 10. Gain/loss | There are chances of making average profits in such a trading style; however, it helps traders achieve their financial objectives successfully. | Intuitive trading strategies mostly result in loss, but once in a blue moon, they may render huge gains by breaking the stereotypes. |
Objective or rule-based trading is a simple, disciplined, and proven trading style in which traders adhere to a specific set of rules and principles for buying or selling stocks, derivatives, commodities, etc., in the financial market. It clearly states the strategies for entry, exit, order type, and market timelines and, therefore, works best for novice traders. Here, traders make a move only when the market is set according to the desired criteria.
Market facts and relevant data often back such trading methods. These trading tactics are developed after rigorous market analysis and years of practice. Thus, these are well-tested and help traders in risk management. Thus, if traders want to be objective, they must always look for examples, charts, and graphs showing the previous application and result of a trading strategy. Objective trading strategies help traders make planned real-time decisions for stop-loss and profit target orders.
Subjective trading is an intuitive form of trading where traders follow general guidelines and believe more in their instincts, feelings, experience, judgment, and opinions when making decisions related to entry and exit in the market. The subjective traders actively follow business news on daily bulletins and social media to anticipate stock price changes. Thus, positive news about a company is seen as an opportunity to enter the market due to greed, while negative news may influence them to exit out of fear and possible risk.
However, the stock prices sometimes show a certain movement due to pullbacks and market corrections, which such traders often miss, and thus, they incur losses instead of booking profits. Moreover, many are always confused about their position and make the wrong decision due to over-excitement or underestimating the situation.
Sometimes, the price movements in the market are driven by the traders' interpretation based on specific news, which is missed during objective trading. However, it requires high-level expertise and involves overnight risk where things may not go as the trader plans, and the scenario may change overnight when the news is released after the market closes.
Objective and subjective trading are the two styles of buying and selling stocks and other assets in the financial markets. It is all about the trader's perception, market analysis, trading strategies, psychology, and risk management skills that make them objective or subjective traders.
Some of the similarities that these trading forms share with respect to how traders act while trading. Let us have a look at a few of them below:
