What Is a Forex Trading System?

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A Forex trading system can be thought of simply as a set of rules for an organized method used to trade Forex.

Forex trading systems have become extremely popular for a number of reasons. One of the most important reasons for this popularity is that fx trading systems allow you to trade in a more systematic and organized manner.

The objective of a Forex trading system should always be to allow the trader to trade profitably. In order for this to happen, of course, the FX system used must be a good one. In order for a trading system be a good one it needs to be thoroughly tested and researched to ensure it will have a good chance of producing profits when trading in the future. Often these test are performed on past Forex market data in a process called “back testing”. Back testing is done using Forex technical analysis techniques in order to find price patterns and parameters which will allow traders to anticipate future price moves.

One of the very best things about Forex trading systems is that they remove the subjectivity from your trading. By removing any subjectivity you are much less likely to trade haphazardly and therefore much less likely to make needless mistakes. Removing subjectivity from your trading also helps you to eliminate any limiting emotions which may negatively impact your trading performance. Also, the fact that good Forex trading systems have been thoroughly tested gives trader a great amount of confidence going forward. This confidence makes it much easier to trade consistently as a trader need only follow the instructions as dictated by the trading system.

In its simplest form a Forex trading system consists of an entry and exit. A simple example might be as follows:

“Buy the EURUSD if it closes above the 200 day moving average”

“Sell the EURUSD if it closes below the 200 day moving average”

Now understand that what we have just looked at is simply an example for the purposes of illustration. It is an example of a simple entry as well as a simple exit to make a basic trading system.

Forex trading systems are in use by successful individual traders and financial institutions around the world. With a good trading system you too can put yourself on the road to successful trading.

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How A Forex Trading System Can Help You Be A Better Forex Trader

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First let’s start off with the definition of a Forex trading system.  A trading system may also be referred to as a “trading method” or a “trading strategy”. The simplest way to put it would be to say that a Forex system is a set of rules to be followed in order to effectively trade Forex.

Forex trading systems usually come in the form of a cause and effect statement. Basically the system works in an, “if — then” manner.  Here’s an example below:

If the EURUSD reaches a price higher than the highest price yesterday, then buy the EURUSD today.

Trading system developers may start off with a simple idea such as the “if-then” statement above.  They will then run tests on the idea using historical Forex data. Their objective is to see how the idea would have performed in the past.  If it performs well the next step is to refine the system through further testing.

A Forex trading system may also be referred to as a “mechanical trading system”.  It’s called mechanical because it performs its duties in a machine-like fashion and gives the trader Forex signals. It does this without fear or emotion and that’s one of the key advantages to using trading systems. Forex trading systems have become popular with both individual traders as well as large financial institutions because of their “mechanical” nature.

With a trading system you essentially have a roadmap to follow as you journey toward successful Forex trading.  A good trading system eliminates guesswork and thusly uncertainty. The fact that Forex trading system has been shown to be profitable through testing gives traders a tremendous amount of confidence.  It is confidence which allows the successful trader to push aside any potentially limiting negative emotions to trade Forex profitably.

A good Forex trading system will provide you with the following information:

What to trade — Your system will tell you which currency pair to trade be it the EURUSD, GBPUSD, EURJPY, etc.

When to get in — A good system will tell you at which price or time to enter a trade

When to get out — Your trading system will tell you when to exit a trade

How much to risk — Never enter a trade without knowing how much capital you have at risk.  A good Forex trading system will have it’s risk defined ahead of time.

When to do nothing — In trading doing nothing is actually doing something.  Being selective and keeping out of potentially bad trades is as important as making profitable trades. Being impatient has been the downfall of many a trader. To profit consistently you must wait for the right opportunities.

As you can see a good Forex trading system can help you be a more profitable, organized, and confident trader. As you may already suspect, however, not all trading systems are created equal.  If you do decide to buy or lease a commercially available trading system make certain that you investigate it thoroughly. Test it using a Forex demo account before using any real money to trade the system.

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