Saturday, June 24, 2017

What are Forex Trading Systems?

Forex RobotTechnical trading systems are used by currency traders to provide clear entries and exits for trades based on a set of rules. By adhering to a very specific set of rules that govern your trading decisions, you have the foundation in place for most robust forex trading systems.

In previous articles we discussed the differences between a discretionary trader and a mechanical trader. A mechanical currency trader will always trade forex trading systems where price action, money management, and any other necessary data are put into a clear and well defined set of rules that will constitute the entire anatomy of the trade.

Currency traders that do not use forex trading systems as part of their trading plan are generally not profitable. Trading a system provides a road map, a blueprint for the trader with a set of rules and a solid trading plan to live by.

What is the difference between a Black Box, A Robot, and An Automated Trading System?

A black box trading system is a trading system with proprietary rules, conditions and indicators for generating trades on an automated basis where the system developer will not make the system’s methodologies known to the user, hence the term, “Black Box”.

A robot is an automated trading system that scans the forex charts 24 hours a day placing trades for the owner of the account. If the Robot does not have a fully disclosed set of rules defining it’s methodology, then it is also considered a black box trading system.

An automated trading system, provided its rules and conditions are transparent allows the forex trader to place trades automatically when the systems criteria are met. Similar to a robot, the differences are that you may opt to run this system only when you are at the screen if you like, versus just trading 24/7 which is the normal intended function of a robot.

What Works and What Doesn’t?

So, as a new trader to the forex markets, how do you make sense out of all this? What works and what doesn’t? There are literally thousands of forex trading systems out there… and I think the important thing to remember is that when it comes to trading, there is no such thing as the holy grail. If the holy grail of trading did in fact exist…. then every one would be getting rich because so many of these systems are sold every day.

The truth is that you, as a trader, need to have enough fundamental knowledge to be able to look at the trading criteria and rules for any strategy or system and at least understand the logic behind it. You then need to be able to take this system and back test it your self over multiple markets and time frames before even thinking about trading real money with it.

Essentially, by doing this… you can see the absolute folly in considering a black box system where you are asked to trade completely in the dark. Besides, the developers of these systems are quite proficient at the art of curve fitting results and over optimization. These deceptive results may show an eye-popping profit, but quite honestly, you could do the same thing with the data from a coin flip too.

The important take away from all of this, is to only trade a system that you fully understand and where all the conditions, stops, indicators, and filters are transparent and fully disclosed.

What Defines Good Forex Trading Systems?

The simplest and most basic definition of a good trading system would be one that provides a statistical edge. A good trading system will take this statistical advantage and combine it with all of the other parts that make up the entire structure of a trade from beginning to end. This would include, at the very least, inputs that will define the maximum loss allowed per trade, total size of the position, an expected profit target, trailing stops, money management, and potentially many other factors as well.

A good trading system is able to take all of the above conditions, and over time be profitable. We are just scratching the surface in our discussion of what good forex trading systems are, but the point being made is that the synergistic combination of many inputs and conditions must show statistical validity that the system is both tradable and profitable.

More importantly, the trader needs to have complete confidence in the systems long term performance. This is absolutely crucial to becoming a profitable currency trader.

As an example, if you know that historically your system remains profitable despite 6 losses in a row,  you will have the confidence to place the next trade in that situation because it is a known and expected part of the data that is used to  develop and select  good forex trading systems to begin with.

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