Forex glossary of terms
Forex trading system
Forex trading is amazingly easy. Despite this it is favorable for one to have his own trading system put firmly in place. Creating a trading system involves three independent yet crucial elements; Firstly one must produce signals. Secondly one must establish some sort of decision making procedures. Lastly one must be sure to include risk management into the system. An effective system should not be subjective or based on any emotion but rather it should be objective and mechanical where the investor should look to produce a combination of time tested and proven trading rules. Generally, effective technical analysis indicators are the mortar that will eventually lead to effective trading systems. It is important to exert sufficient caution however because as previously noted, even effective technical analysis indicators can become ineffective when incorporated into a trading system. Therefore it is advantageous to forward test any chosen system in real time in addition to back testing it.
The downside of Trading Systems
In theory, trading systems are meant to be mechanical and objective meaning that they should remove any shred of intuition from trading. One should follow a set out system by buying and selling when the system dictates to do so. The only problem with this logic is that there are only a few good trading systems that exist. Furthermore, some systems which were created are only advantageous for specific institutions in order to capitalize on opportunities, or include complicated derivative strategies. These specific strategies are not tailor made for an average trader.
Two different types of Forex trading systems exist. They are mechanical and discretionary systems. Trading signals generated from mechanical systems come from the systematic application of technical analysis, whereas experience intuition and judgment on when to enter and exit are more prominent in discretionary systems. Lets take a closer look and describe the fine points of each system.
-Can be efficiently back tested and automated.
-Adheres to unbreakable rules
-A trade either exists or does not exist.
-Traders who use mechanical systems are usually far less vulnerable to emotion than traders who use a discretionary system.
-Surprisingly, the backtesting of forex systems is done incorrectly by most traders.
-Trick data is essential in order to produce proper results.
-The Forex market is volatile
-A random component exists in The Forex market and all markets for that matter.
-Although market conditions may appear to be similar they are never identical.
-Thus a system that achieved results a year ago may not be successful the following year.
-One benefit of Discretionary systems is that are flexible to adapt to quickly changing market conditions.
-Rather than a mechanical system, Trading decisions are done according to intuition and experience.
-Experience allows traders to learn from experience and discover which trading signals are more likely to succeed.
-Backtesting and automated systems are not applicable since tough manual decisions need to be made.
-Time and experience are needed in order to gain the appropriate experience necessary to make successful trades and keep cautionary track of them.
-This is a dangerous strategy for rookie traders.
There is not necessarily one better approach for Forex traders. Traders should stick with whatever system feels more comfortable for them. If you are a trader who finds it difficult to stay disciplined and follow your trading signals, then a mechanical system would probably be a better fit for you because your intuition will be eliminated in that system, instead only taking the signals that the mechanic system dictates. In order to be a successful trader, one's goals and objectives should include the following features. They should be very specific. Also, they should be significant and reflect the amount of work and time involved. Finally, they should be measurable within the given time frame one gives himself.
Here is a sample outline of possible objectives one could have for himself for a given year
1. Generate two fresh positive-expectancy trading systems that are effective each year of operation
2. Attempt to commit fewer mistakes with each passing year when implementing the trading systems
3. Attempt to obtain a specific percentage (your discretion) of maximum return each year
4. Each year one should take at least two weeks vacation time away from trading.
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