Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets.
Objective vs subjective trading: Most traders follow either an essentially objective or subjective trading style. Objective traders follow a set of rules to guide their trading decisions. They prefer to have buy and sell decisions essentially pre-planned. In contrast, subjective traders disavow using a strict set of rules, adapt to changing market conditions, and base their trading decisions more on their judgment regarding a specific trading opportunity.
Subjective traders are usually more vulnerable to falling prey to various behavioral finance biases or to being guided by emotion rather than reason in their trading decisions.
While there are disagreements about the merits of objective vs subjective trading, most traders are in agreement about the wisdom of approaching the market with an established trading plan. Using a trading strategy or system that you’ve tested and practiced makes it easier to make good trading decisions in real time, under sometimes volatile or rapidly changing market conditions.
Objective trading is also referred to as rule-based trading, and it is the simplest way to trade. The trader follows a clearly defined set of rules for trade entry, exit, time frame, order types, and markets. It is designed more like a “set it and forget it” automated trading system. The trader merely waits until his criteria are met for initiating a trade. He takes a position in the market, and then enters “take profit” and “stop-loss” orders to manage his eventual exit from the trade. After that, it is pretty much a matter of just letting the trade play out, either hitting his profit target or being taken out of the trade by his stop-loss order being triggered. His trading strategy may have rules for adjusting profit targets or stop orders in accord with market action. However, he will usually be much less active in that regard than a subjective trader.
Due to the relative simplicity of objective trading, it is ideal for new traders who lack the skill and experience required for complex market analysis and interpreting trading signals. A set of rules to guide both trade entries and exits can lower the stress level and psychological pressure that novice traders may naturally feel. An objective, rules-based trading strategy also helps new traders to avoid one of the most common beginning trading mistakes – trading driven by emotion. Strict rules to follow will also provide important risk protection.
Subjective trading is more appropriate for experienced traders who are familiar and comfortable with the markets they trade. Experienced traders also have more of a “feel” for price action. For example, they are better equipped than beginning traders to be able to accurately assess whether a market move is merely a temporary corrective action or an actual trend reversal. Having seen plenty of price action patterns unfold, they can more easily detect and correctly interpret various patterns of price movement in the market.
Subjective trading is not just trading based on feeling. Successful subjective traders don’t just take trades at random. Their trading decisions are still guided by a trading strategy. And subjective traders employ very objective market analysis in making trading decisions.
The key difference between subjective and objective traders is simply that subjective traders do not consider making market entries and exits just based on a set of rules to be the most effective trading strategy. Instead, they believe in the value of evaluating each specific trading opportunity in light of recent price action, current market and economic conditions, and yes, their “gut feel” for the market, honed from years of trading experience.
Whereas objective traders follow more precise rules, subjective traders are more inclined to operate using just general guidelines. For example, objective traders may follow a rule that tells them to always place their stop-loss order 20 points from their trade entry price. Subjective traders exercise more flexibility in regard to where they place stop-loss orders, but do employ general guidelines that help determine an appropriate amount of risk for each trade.
Adapting to Changing Market Conditions
Securities prices can fluctuate substantially even over the near term and market conditions are always subject to unexpected change. These basic facts of trading give an edge to subjective traders who are more inclined and prepared to continually adjust their market position. Objective traders who are more constrained by trading rules are less likely to be able to successfully navigate their way through rapidly shifting market conditions, pressures, and trends.
Objective vs Subjective Trading – Some Examples of the Difference
An objective trader is likely to be entering trades based on a rule such as, “Buy when price moves above the 50-period moving average”. A subjective trader may consider buying at that same point. However, rather than making an “automatic” entry based on a rule, they will first take into consideration things such as the perceived momentum of the market’s price action. For example, does the movement of price above the 50-period moving average appear to be a high-momentum breakout move? – Or does it look more like the last gasp of a market that is severely overbought and possibly due for a downside correction?
The objective trader is looking more at a generic type of trading opportunity. The subjective trader is focused more on identifying the specific nature of “this” particular trading opportunity. An objective trader will, therefore, make more generic trading decisions. A subjective trader will aim to more precisely identify the risk and reward parameters that apply to a specific trade.
When they place a stop-loss order, the subjective trader will again be disinclined to just use a hard and fast rule for stop placement. Instead, they will select a stop-loss price level based on both acceptable risk and on factors such as the recent and/or anticipated level of market volatility.
Once in a trade, as noted above, objective traders are likely to use rules to select a profit target. The subjective trader’s selection of a profit target is likely to be more nuanced and more guided by the specific market conditions prevailing at the time. It will also be more readily subject to rapid re-evaluation if market conditions appear to be shifting.
Objective vs Subjective Trading – A Final Word
Neither objective nor subjective trading is “right” and the other “wrong”. It is simply a matter of which trading style a given trader is more comfortable with or has a preference for. Objective trading is probably the best trading approach for novice traders just because subjective trading is more dependent on trading skill and experience that can only be acquired over time.
Thank you for reading CFI’s guide to subjective vs objective trading. CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:
Take your learning and productivity to the next level with our Premium Templates.
Upgrading to a paid membership gives you access to our extensive collection of plug-and-play Templates designed to power your performance—as well as CFI's full course catalog and accredited Certification Programs.
Already have a Self-Study or Full-Immersion membership? Log in
Access Exclusive Templates
Gain unlimited access to more than 250 productivity Templates, CFI's full course catalog and accredited Certification Programs, hundreds of resources, expert reviews and support, the chance to work with real-world finance and research tools, and more.