What is a Forex Trading System?
A Forex Trading System may also be dubbed as an investor’s strategy when it comes to handling their accounts. Specifically, the system guides a person into predicting the best time and price for them to open and close trades. With this guide, the risk investors take when it comes to trading is lessened.
Types of Forex Trading System
There are two methods of establishing a system in Foreign Exchange – mechanical and discretionary.
- Mechanical: as the name suggests, this Forex Trading System utilizes programs to arrive at decisions. They operate using pre-programmed calculations, fixed numbers and fundamental signals – all without help from the trader. Typically, systems like these are set beforehand by the trader according to their personal preferences and then allowed to run.
- Discretionary: obviously the opposite of Mechanical, a Forex Trading System like this is typically done manually. Traders use their own judgment to arrive at decisions but still with the help of tools for analyzing. This requires that the trader be flexible and intuitive in order to earn profits through forex.
Creating a Forex Trading System
Beginners rely mostly on different forex trading tools and maps to create their first system. The good news is that over time, beginners would learn more about the process and be confident enough to follow specific patterns combined with their gut feeling. Traders could also use different signals in the system to indicate whether it is time to act on their investments.
The development of a system typically has four parts:
- Use of fundamental and technical tools to arrive at possible signals for the system. During this part, traders would analyze raw data to spot specific indicators of when the foreign exchange market is becoming better or worse.
- Once the signals have been properly tabulated, traders can now arrive at conclusions regarding the patterns they’ve noticed. For example, what conditions immediately happen after a specific signal and how can it be used to the trader’s advantage?
- Optimizing the parameters of the analysis tools to find out the best time and prices for opening and closing. This third part is typically used for mechanical systems. Through optimization, traders would be able to pinpoint the perfect timing to open or close their accounts that would result to the highest profits possible.
- Backtesting and forwardtesting the system are possibly the most important parts of the process. During this time, traders would need to “test” their new system using historical data to find out if it holds true. When this is done, forwardtesting should be started to make sure that the system performs the same way. If the results for both tests are close, traders can harbor more confidence for their newly created system.
Now a Forex Trading System may seem complicated at first but overtime, traders would start to become accustomed to the process. Note that the four steps mentioned above should be seen as a cycle or a continuous process. Traders must always adjust their parameters and look for signals that would help them with market predictions.
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