Learning Forex : Choosing a Winning Trading System


You’ll hear many say that people who try to become forex traders will nearly always fail. A good many do so because of a lack of adequate risk & money management. But for others, their inability to succeed can be put down to their trading system, or “lack of”.

Those who find winning trading systems early on are far more likely to succeed and become profitable than those who don’t.

Are You Suited to Trading?

Trading forex isn’t technically difficult compared to say trading exotic options, structured derivatives or even stocks. Even so there are a vast number of variables that impact currency exchange rates (see Figure 1).

Figure 1: What factors influence currencies?
Figure 1: What factors influence currencies? © forexop

Getting to grips with these factors is a major challenge. It’s one that many forex professionals spend their entire careers trying to master.

For many people, whether or not they become profitable online traders is down to their ability to comprehend these factors. More importantly, if they are able to turn this insight into a trading system that works for them.

It’s nigh on impossible to predict someone’s abilities in such a complex undertaking – but what’s clear is that those who find winning trading systems early on are far more likely to succeed than those who don’t.

To start with, if you’re thinking of embarking on a trading career, some things to ask yourself are this:

  • Do you really have the capacity and disposition to spend hours monitoring the currency markets?
  • Do you have the time and know-how to analyze the torrent of economic releases and data which may impact your trades?
  • Do you have a calm, positive mental attitude or would you fret and worry every time a trade goes against you?
  • Do you have enough free capital? As a rule of thumb, any money you put into the forex markets should be “risk capital” – that is money you or your family can live without (more).
  • Do you have an alternative income source? Trading returns can be highly unpredictable (positive as well as negative). This shouldn’t be your only source of income.

Your answers to the above will tell you which system, if any, is best suited to your goals and circumstances.

Guided Trading Systems

If you don’t have the time, experience or financial means to trade yourself there are other ways to participate and profit from the currency markets using guided trading systems. These systems are useful for people who’re new on the learning curve – or who simply don’t want to spend their time analyzing economic and financial data.

Copy trading

The first of these is copy trading. I’ve talked on this topic in other posts at Forexop. In a nutshell, copy trading allows you to piggy-back the trades of more experienced market players.

It allows you to get your feet wet so to speak and understand the terminology and risks involved without having to make trading decisions yourself.

The copy trading system has proven so universally popular that most brokers now offer it in some form or other. If you’re thinking of going down this route there are several primary brokers that have copy trading services (eToro’s service is one) as well as Currensee.

Forex signals

The second way to profit, if you don’t want to trade yourself is to use forex signaling software. Forex signals are generated by a providing trader or an algorithm. They are then sent to receiving clients or followers. The local platform then executes the trade instructions on the client’s account.

Warning There’s a vast marketplace of commercial forex software out there. Unfortunately, much of it is useless. What’s worse is that the sellers publish highly misleading claims about returns, and historical performance data.

Forex robots can and do work. But it’s important to be aware of the risks so as to make an informed choice. An alternative for beginners is to use a platform such as ZuluTrade. This website rates and ranks a massive range of forex signals, partly through their vast user community.

Once registered you can connect your broker and accept trade signals from any number of different providers.

The good thing about this is that ZuluTrade lets you customize the trading and risk parameters of each signal. It also has a block and rotate feature which will automatically kick-out of your portfolio badly performing signals before they run-up damaging losses and deplete your account (read more).

Expert advisors

The third guided trading system is what’s called an expert advisor. These handy little automated programs work within trading platforms such as MetaTrader 4 and 5. While signals are received externally from a third-party provider, an “Expert Advisor” is software that runs locally on your own trading platform.

It will generate entry and exit points on which you execute your trades. The level of automation and configuration of the advisor is usually fully customizable. Expert advisors are a half-way house between fully automated signals and trading on your own.

Technical Trading

Foreign exchange is predominantly a technically driven market. Technical drivers are far more influential in forex than they are in other asset classes.

This is one reasons many newcomers are attracted to this market. Unlike trading stocks or bonds, you don’t have to scrutinize earnings reports, balance sheets, cash flow statements, business strategies and so on. Many successful forex traders do so purely on their ability to understand price movements on a technical level.

Charting, as it’s known, is the main tool of the technical trader. Pure technical analysts believe that all relevant information is reflected in the charts – and therefore analyzing financial data is unnecessary. They use known patterns and configurations in historical data to predict future price movements.

Most traders use these sorts of rules of thumb all of the time. For example, you might have heard of phrases like “the trend is your friend”.

Figure 2: Charting with Bollinger band channels and MACD analysis
Figure 2: Charting with Bollinger band channels and MACD analysis © forexop

The difference with chartists is that they use technical factors as their primary source of trading decisions. Technical trading can be highly profitable, even over the long-term.

Trading indicators Common indicators used by technical traders include:

Risks of Using Only Charting

As I mentioned above, there are also powerful fundamental forces the influence exchange rates. Notably:

  • Economic conditions
  • Monetary policy
  • Geopolitics
  • Fund flows
  • Debt
  • Risk appetite

Traders who use purely technical systems run the risk of being positioned the “wrong side” of important economic events. When important news hits the wires and it’s unexpected or not in line with market expectations it can cause massive, disjointed movements in currency markets.

This may include sharp corrections, trend reversals, as well as extreme volatility. It’s for this reason that less experienced technical traders often give back all of their gains over time.

The savvy technical trader soon learns to avoid holding positions during important economic releases. This point is also worth bearing in mind if you’re primarily using automated trading signals.

Keep in mind that 99% of them work exclusively on technical indicators. They can only respond to the activity after it’s taken place.

It’s only highly sophisticated computer models which can interpret economic data in a reliable way. Generally, developed by investment banks and hedge funds, these black boxes are well beyond the reach of most private traders.

And Finally…

Whatever system you use, trading isn’t just about numbers. Whether you’re trading yourself, or using a trading advisor, having the right mental approach is one of the key elements of success.

While the rewards in forex can be substantial, you have to remember there are a lot of smart people trying to do exactly the same thing as you are. Staying one step ahead of the game is critical to success.

Despite what many people claim, there are no easy riches to be made in the financial markets. Turning online trading into a profitable endeavor takes a lot time, effort and commitment – sometimes this can take years.

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