The Benefits of Forex Trading Systems

Thursday, June 21, 2007

Today, Forex trading is a popular form of investment for many people, and many of them do not have experience or training in short-term trading. However, there are now two Forex trading systems that can help you with this exciting vocation. First, you have the Mechanical Trading System that works off the premise of technical analysis. The Discretionary Trading System, on the other hand, involves using your experience, intuition, and judgment. It is discretionary because you can choose what factors to use when deciding to buy or sell currencies. Before you stake your preference on either system, let us take a closer look at the benefits and concerns of each system.

The first major benefit of the Mechanical System is you can automate this system and back test it when you need to. However, it does have rigid rules you will need to follow. This is a great system if you want to keep your emotions in check as you decide on your trades.

On the other hand, the back testing feature is great only if you know what you are doing. This means you can back test and produce wrong information for trading. You can, however, subscribe to a tick data service to ensure you have the correct information. This also means paying for the extra service.

You also have to keep your technical analysis up-to-date. Not all the equations will change in a day or two, but in one year, or two years market conditions will have changed many times. If you keep using the old equations, you will get the same results that were applicable when you first bought the system.

But the mechanical system is the one for you if you just want to know when to enter and exit the market with your trades.

Now, let us look at the discretionary system

The great thing about this particular Forex trading system is that is easily adaptable to new market conditions. This works well for the constantly changing Forex market and is a major advantage over the mechanical system. Also, as you use the Discretionary system for some time, you will get to know how to interpret easily the buying and selling signals. This means you have a higher likelihood of profitable trades.

Your concerns would include your inability to either back test or automate the discretionary system. After all, how can you automate your habits, judgments, and aha moments. If you could, you would not trade but sell your system for profit.

It also takes time to gain experience, as well as develop a successful trading strategy. Some people have spent many years before they can master this aspect of trading. But once you get it right, you are well on your way to big checks from your broker. Though, in the early stages of trading, you could expose yourself to risk because of ignorance.

There you have a brief analysis of the benefits and concerns of the two Forex trading systems. You need to decide one or the other based on your personality. You may have a better edge with the Mechanical system if you can follow instructions well. On the other hand, if you prefer using your emotions and experience, the Discretionary System might suit you better.

Forex Trading Rules to Live By for Profitable Currency Trading

When trading the forex there are a few very important rules that you should never break. By sticking to these rules on a consistent basis, your chances of success as a profitable forex trader will greatly increase.

A big mistake most unsuccessful traders make, whether they are forex trading, trading stocks, or any other market, is that they let emotion get in the way, they break their own rules, and they lose big. Don't let this happen to you.

For your forex trading to be successful you need to set specific goals and objectives regarding your forex trades.

Like almost anything else you want in life, you'll greatly increase your chances of being a successful forex trader by developing and writing down specific goals that you want to reach. Your goals need to be specific, measurable and realistically achievable.

This doesn't mean you shouldn't aim big, but if you are starting with $10,000 in your forex account, you should not have a goal of being a millionaire by the end of the week. You're just setting yourself up for frustration and failure.

Your forex trading goals could be things like:

Achieve a maximum draw-down ratio of 1.6:1

Develop one new positive-expectancy forex trading system every six months

Consistency And Discipline in Forex Trading

If you are going to be a successful forex trader, you need to be consistent and disciplined when it comes to implementing your forex trading system. This is where many forex traders lose their way. They let their emotions get the best of them and break the rules of their trading system. This causes more (and larger) losses than usual and may drive you away from trading permanently.

It takes a lot of discipline to stick to your trading system. But it's necessary for long term success.

Let me give you an example that hurts many traders on the upside. They follow profitable trades after they have already closed out their position. While you need to let profitable trades run, it's also important to have ever higher stop losses in order to protect yourself.

For example, in your forex trading system your stop loss may be 5% behind the current price. If your trade drops 5%, you trigger the stop loss and get out. Here's where the problem can occur. It then rebounds and scoots much higher.

So instead of being happy that your system worked and you profited 20 or 30%, you are unhappy because you missed out on another 20% after your stop loss was triggered. So next time, you ignore the stop loss.

Unfortunately, it keeps going lower and lower and you keep holding, waiting for a rebound that never occurs and you've suddenly lost half your training account.

Discipline is a huge component of successful forex trading. Forget it at your own peril.