What do You Know about Forex Trading Systems?
8 minutes for reading
Before talking about forex trading systems, it would be better to find out what systems exist at all, which system suits which trader and what trading system to choose. Searching for your best forex system through trial and error may take years, that is why this issue requires a systemic approach.
First of all, trading systems can be divided into two groups: mechanical and discretionary ones. A mechanical trading system will require from a player nothing else but disciplined trading, because decision-making is built in the very algorithm of the systems. The advantage of such trading systems is the lack of emotional involvement into trading and of feeling responsible for its result: all steps are prescribed by the algorithm. Drawbacks are the very same – in case the market changes, the algorithm may start generating losing trades that the trader will have to perform without question, watching their money disappear.
As you may see, being a mere executor is not that easy. If the trader does not understand the market and the reasons for making certain steps, this may let them down, because at some point they may start sabotaging the prescribed trades. However, if you have created the system yourself and you are sure that it is based on the fundamental rules of the market, it will be much easier to follow such trading system. My experience and that of my fellow traders suggests that the most successful trading systems are those that blend in mechanical algorithms and independently made decisions.
For example, the trader decides themselves, what the conditions on the market are: is it trend or wideband, whether to execute this or that system, etc. As for the entrance and exit points, the rules of following the positions, they should better be automatized. In other words, systematic vision should be entrusted to the trader, while tactic nuances are better be decided by the home-made algorithm.
What trading systems to choose?
First, it is worth remembering that your trading system should be in compliance with your psychic type and your lifestyle. For example, scalping will not suit those who are accustomed to having lots of free time. What is more, many people have the main job aside from trading, so they will have to decide whether their job will allow them to trade in accordance with the chosen trading system.
Special attention should be paid to the timeframe that you are planning to choose signals on. The smaller it is, the more information you will be receiving, the more contradicting signals will come, the more pressure you will feel. Many beginner traders try to switch to smaller timeframes (M5, M15), but it is worth remembering that competition there is more intense, so it is harder to find profitable trading situations.
Let us compare it to playing sports: developing a career, a beginner football player starts at their town’s football team, then goes to the national league, then (only if they are lucky) they take part in the world cup. Meanwhile, there are no intermediate levels in trading. Entering the market, a trader has to start rivaling with pros at once, that is why it is feasible to minimize risks and weight up your chances adequately – for example, trade minimal lots at first and work on the Longer timeframes (H4 or D1).
Role of the trading system
Before classifying trading systems, let us figure out the part that they play in trading.
In fact, this part is rather simple to understand – the trading system realizes a certain advantage, outplaying the market for a period of time. As you may have guessed, there are no universal trading systems, because the market is constantly changing. Let us look at the following example: until 2004 scalping on the futures E-mini S&P was quite widespread, allowing traders to make good profit. Then markets became more efficient thanks to the development of trading through algorithms. Robots made this sphere ineffective: prices could be on a halt for hours, and scalping lost its previous charm; conversely, position trading gained popularity. This is the way some trading niches close and some open.
In essence, a trading system contains the plan for realization of the advantage, existing on the market, inside your trading niche.
As I have already mentioned, it is critical to select the system that suits you in particular as a trader. Beginners forget about this nuance rather often, thinking that the main job is to create a trading plan. It seems to them that following the plan is something natural. However, the experience of legions of traders demonstrate that the execution of the plan is the most difficult part of the process, no matter whether you are using a mechanical or a discretionary system.
Your psychic type will take its course in the end – you will linger to those systems and trading styles that suit your temper, character, abilities and habits. This is a thing better realized “ashore”, before you send your capital cruising.
Scalping and day-trading systems
If you can take quick decisions, and all processes in your brain run fast, you may become a successful scalper. Scalping is often mixed up with pipsing (when the trader enters a position to earn 1-2 points).
A scalping trade normally takes much longer, but the essence of this system is in following the most short-time changes in demand and supply and reacting accordingly.
Scalping trades are usually breakout ones, but can equally happen on pullbacks. A scalpers defines a very short-term graphic pattern and places an order on a breakthrough of this pattern (or waits for a signal from indicators). In some cases, a scalper can make a trade on the pullback from the resistance/support levels. A trade can take several seconds or minutes; however, today many scalpers become positional day-traders, increasing the length of their positions to several hours or even a whole day.
Most probably a scalper should stick to a liquid and volatile market that makes a lot of movements during the day. To my mind, currencies, gold and oil suit this purpose rather well. Oil and gold are volatile enough to provide wide perspectives of directed movements; however, they are considered (quite fairly) hard markets for pullback trading as sharp price surges, capable of throwing the trader out of the market, are characteristic of these instruments. Currencies and fund indices are calmer instruments allowing for technical pullback trading (though on these markets surges of volatility happen as well).
Short-term trading systems
Speculators that hold their positions for several days (1 to 3 days), are called short-time traders, or, sometimes, swing-traders (depending on the sources). Such systems may suit you if you are accustomed to concentrating on the whole picture rather than on details, as well as to analyzing several markets simultaneously.
While a scalper or a day-trader concentrates on one or two instruments (as they may not have enough attention span for more), a short-term trader is capable of analyzing 8-10 instruments or more. The changes on their timeframe are not as swift as in the case of day-trading, so they have more time for a thorough analyzing, following more instruments and searching better conditions.
If you are fond of researching new things, looking for opportunities on different markets, if you do not get tired from frequent trading signals (though not too frequent to take up 90% of your attention), I would recommend you to select signals that require transferring to at least the next day. Clearly, you will have to analyze longer timeframes for this purpose.
Finally, the slowest type of trading is the positional one. Here a trader can hold a trade for weeks or even months, gradually increasing or decreasing its size. Many traders consider this system to be the least profitable of all; however, the statistics tells vice versa: 90% of scalpers and day-traders lose their assets on the market, while positional traders gain profit much more often. The less the amount of price “noise”, the less the amount of unnecessary information and the easier it is to make decisions. What is more, positional traders play “under protection” of major traders more frequently.
Positional trading normally exists in the trend variety. The trader’s task is to find either a forming or an already formed but not completed trend, join it and hold the position either until it starts demonstrating upcoming weakening (impulse trend trading) or until the trend proceeds to the phase of allocation/climax (position trend trading).
In both cases one has to have a lot of patience and ability to wait for the result. If a D1 does not lower your interest to trading or if you become too emotional in case of quick changes characteristic of day-trading, perhaps positional trading will be the best choice for you.