Forex Trading Systems – What You Need To Know
Last updated on March 10th, 2020
A Forex trading system is a method of trading that uses objective entry and exit criteria based on parameters that have been validated by historical testing on quantifiable data (backtesting)
Although there is no hard and fast rule for designing the best Forex trading systems (different experts have different opinions including automated systems); the essence remains the same.
In general, a Forex trading system provides the discipline to overcome the fear and greed that in many cases paralyze a trader, and prevents him or her from making timely decisions.
Each order placed is governed by a pre-determined set of rules that does not deviate based on anything other than market action.
Like any other trading system and method, Forex trading systems boil down to risk versus reward.
How much capital you are willing to put at risk for a given level of return should be your top consideration.
Beyond that, one must consider costs, trading activity, and markets traded before investing. Indeed, the best Forex trading systems are a good mix of art and science – art because it comes through practice, and science, because it has certain rules, regulations and principles to be followed.
Knowledge as well as technology plays a very vital role in every decision you take.
Automated Forex Systems
In the field of trading systems, automated Forex trading systems are techniques that make trading decisions for you. You input the trading data, and the system generates a response that indicates the appropriate action.
You buy, sell, or do nothing depending upon the formulas this system uses and operates upon.
The latest computer versions of these mechanical systems are complete “black box” operations (you cannot have all the emotion involved when you follow a specific system). Perhaps, that is one of the reasons that these systems are called mechanical systems.
But that doesn’t mean that they aren’t intelligent enough.
Turn the computer on, start the system, and it updates your database, and generates trading recommendations, and places your orders directly to the brokers.
Importance Of A Good Forex Trading System Can’t Be Overstated
Unquestionably, in Forex trading systems, speed is of the essence in these hectic times. Every nanosecond counts when you are trading using five minute charts.
The most basic Forex trading strategies rely on moving averages.
The more “sophisticated” systems use combinations of moving averages of both price and volume.
Most of these Forex trading systems are reactive (not proactive!!) by design. For example, if a stock or a commodity acts in a certain way, the system assumes that the stock or a commodity will continue to act that way.
It generates this conclusion based on the formulas programmed into the system some “Black Boxes” also compute a large array of trading indicators in an attempt to increase confidence of an action recommendation.
Most mechanical trading systems buy or sell breakouts or use pullbacks as trade setups. Some will also use an increase in momentum to generate a trading signal.
Their formulas assume a continuation of that movement. Should that movement fail to continue, the Forex system will generate a loss, plus the commission cost.
Everybody who is committed to making as much money as possible with foreign currencies needs to understand the importance of having the best Forex trading system possible. The real benefit to having a system to rely upon to make trading decisions stems largely from the fact that we cannot really make the best decisions possible without having a framework in place.
While it’s certainly true that this can be intimidating to people who are brand-new to Forex currency trading, this is a concept that truly needs to be understood if a person is to give themselves the best chance possible of being successful.
Advantages and Disadvantages To Trading Forex
There are many advantages and disadvantages to Forex Trading.
In many ways, this is a lot like a strategy game.
While it’s certainly true that you can play the game without actually having a strategy in place, your odds of being successful are a lot lower. It is the same way with trading currencies. You need to have a basic strategy or framework in place that will govern all of the trading decisions that you make.
Fortunately, you don’t need to invent your own Forex trading system.
There are a wide variety of different systems that you can look at so as to be able to pick one that is most suitable for you and your goals.
What you’ll discover after you have been involved with Forex currency trading for a period of time is that you will begin to borrow elements of different trading strategies to create the best Forex trading system for you.
You may discover that there are certain aspects of a particular system that you find very appealing. Not only that, you may also find that those aspects can be incredibly profitable when used in conjunction with elements of another Forex trading system.
That being said, this is typically only something that people who have been involved with currency trading for a period of time are able to really determine.
New To Forex?
What you should do if you are brand-new to the world of currency trading is familiarize yourself with some of the different currency trading approaches that exist.
Not only will this give you the vantage point of being able to see how others go about the process of trading currencies, it will also help introduce you to some of the different Forex trading system variables that (in some cases) are universal among all the different currency trading frameworks.
Above all else, it is important to realize that the only way to really make a determination as to which Forex trading system is best for you is to actually experiment with a wide variety of different systems to see what kind of results you get.
It’s not enough to simply look at the results obtained by somebody else. At the end of the day, the only results that really matter are those that you were able to obtain for yourself through the use of a particular system.
Therefore, you need to be open-minded to trying different approaches to see what kind of results you get.
Regardless of the specific Forex trading system that you ultimately choose, it is critically important that you understand that you must have some basic framework in place before you commence trading currencies in earnest.