What Are Forex Trading Systems?
A Forex trading system is a set of rules which are aimed to ensure that you are trading in a way that is free of bias and the influence of emotion. Most beginner traders will look to learn a forex trading system whereas more experienced traders will eventually move to build a trading system of their own.
A good Forex trading system should look to encompass and cover for all possible eventualities which the markets may through up. In that respect, they should comprise of rules which govern, amongst other things the following:
- Which currency pairs to trade.
- When exactly to enter and exit a trade.
- Where to place Stop Losses and Take Profit rates.
Forex trading systems must always be tested against historical data (known as back-testing). Beginner traders, when looking to purchase a forex trading system, should always ensure that the system was properly back tested and that the results are genuine. There are certain software packages available now which back-test trading systems automatically.
Which Forex Trading System to Choose?
This will depend upon your trading style. Some traders are swing traders and will look to keep positions for days, weeks or even months. Others prefer a day trading style and will be in and out of a trade within the same day. A typical swing trading system will look to take larger moves ranging from 100-300 pips over a period of a few days or weeks. On the other hand, an intraday forex system looks for smaller opportunities ranging from 25-50 pips.
Forex scalping systems have become popular of late as well. Scalping is a trading style which looks to take profits on very small price changes, usually soon after a trade has been entered into and becomes profitable. It is a strategy that does not look to capture 50+ pip moves; rather it is more about watching the price and getting in and out of trades for quick 5 pip moves which little by little add up.
While this might sound risky, it can be quite a low risk strategy if performed correctly. As with all trading systems, the most important parameter which has to be addressed here is money management. Having a strict exit strategy and rules on how much of your equity to risk per trade must be clearly outlined.