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To succeed as a currency trader, you must have a very good understanding how the forex market works, without a strong foundation of forex core market knowledge, you can never take yourself to the next levels of currency trading. The next level from the bottom is trading styles, ask yourself the following question: Are you a scalping, short, swing, position or long term currency trader?
The following level and one of the least understood aspects is the trading systems level, without a thorough understanding of forex trading systems and the strategies / money management rules designed for each kind of system, you may yield very disappointing trading results.
Let's take a closer look for better understanding...
What is a forex trading system?
A forex trading system is defined by a common set of rules developed around technical indicators that signal entry and exit points for a given currency pair.
Some popular indicators to develop systems are:
Moving Averages(MA's)
Bollinger Bands
DMI Indicator
Commodity Channel Index
Moving Average Convergence/Divergence (MACD)
Relative Strength Index (RSI)
For example, a very popular and simple currency trending trading system is the moving average cross-over system, this trading system combines 2 moving averages, the long-term and the short-term to create a buy ar sell rule, "when the short term MA crosses the long term MA from below, this will generate a buy signal, conversely, when the short term MA crosses the long term MA from above, this will generate a sell signal. Take a look at the picture below.
EUR/USD Moving Cross-Over System on the weekly chart using the 5EMA-short term and 200SMA-long term moving averages.
Most popular forex trading systems used among currency traders
- Trending Market Systems - Trending market - based systems are the most popular of all currency trading systems. A trending system will perform excellent when the currency pair is moving in a strong up trend or downtrend. Trending systems can be used for day trading, swing trading, position trading or long term currency trading. Stops in such a systems are usually tight as most trending currency systems employ the theory that there will be many small stops and a few large profitable trades. Popular indicators to build forex trending systems include Moving Averages and DMI.
- Ranging Market Systems - Ranging market - based systems will perform best when the market is moving sideways, in general, these systems will give a buy or sell signal when the market is either oversold or overbought. Stops in such a system are placed above or below the trading range. Ranging systems take advantage of the cycling pattern of the trading range market and can be used for day trading, swing trading or position trading. Popular indicators to build forex ranging trading systems include RSI and Stochastic oscillator.
Advantages of using such a system
- Detach emotions from your trading - You only need to take trades when the system gives clear “buy” and “sell” signals. Systems specify when to enter and exit based on a clearly defined set of conditions, which automates the entire trading process and effectively eliminates emotions like fear and greed from trading, the major pitfalls of most novice and casual currency traders.
- No need to analyze forex charts - Once an effective currency trading system is developed and optimized, very little to no effort is required by the fx trader since the system will make the "buy and sell" analysis for you.
- Benefit from the discipline of a systematic approach - A system helps to take away that decision-making "Should I take the trade or not?" hesitancy that newbies and casual traders often face. An effective fx system stops them from overtrading and guarantees that they only pull the right trigger at the right time. Trading systems are quite handy for experienced traders as well because they are objective and static and help traders to improve their strategies and money management rules.
Disadvantages of using such a system
- Systems do not work all the time - A system is not the holy grail and will have losses too, a trending system in a ranging market will not work, conversely, a ranging system in a trending market will not work but no matter what, you should keep following your system rules to track it's performance under various market conditions.
Main goals of developing a currency trading system
Developing a profitable system should be your most important goal. Is this an easy task? Not really if you are new to forex. Before getting started, you need a strong foundation of forex core market knowledge and how technical indicators work.
For example, if you want to develop a trending system, you should know how to:
1) Identify a new trend
2) Confirm this trend to avoid most false break out signals
Solution: You can easily spot new trends using moving averages and confirm the new trend with various indicators such as DMI or MACD.
Dealing with forex system scams
When surfing the internet or typing "forex trading system" into google search, you have probably seen them, the forex scams promising you 25000 pips a month or 3000% yearly for only $1495. These systems make thousands of pips a week and never lose. Think for yourself, if this were true, wouldn't the system seller trade his or her way to becoming a super billionaire?
Some good advice:
If you want to purchase a forex trading system, a common way to avoid scams is to to seek out systems that offer a free trial or at least a 30 day money back guarantee.
Summary
Winning traders often use very simple systems they have designed and developed their own. All that really matters is what makes money and what doesn't. They also are disciplined and consistent in the implementation of their preferred approach. Trading systems can be very profitable if designed and back- tested correctly, before going live with real money, you should trade your system on a demo account for at least 3 month!
If you want to purchase a forex trading system, a common way to avoid forex scams is to to seek out trading systems that offer a free trial or 30 day money back guarantee (take a look at our forex systems rating section). That way you can test the system yourself. As always, remember to stick to your plan and systems rules! |
