Learning Forex : Choosing a Winning Trading System

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While it is possible to earn significant profits as a trader in the forex market, many who try to do so fail. For some it’s because of a lack of adequate risk controls. But for others it can be down to their trading system, or “lack of” one to be more precise.

Those who find a winning trading system early on are far more likely to succeed and become profitable than those who don’t. This post looks at factors to consider in choosing a trading system.

Are You Suited to Trading?

Trading forex isn’t technically difficult compared to some other markets. 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 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 impossible to predict someone’s abilities in such a complex undertaking. But what’s clear is that those who find a good system early on are more likely to succeed in the long run.

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

  • Are you able to spend hours monitoring the currency markets?
  • Will you be able to analyze the 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 money? 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

Learning to trade takes a long time. If you don’t have the time or willingness to trade yourself there are other ways to participate and profit from the currency markets. One of these is copy trading. These systems are useful for people who’re new to trading – or those who simply don’t want to spend their time looking through economic and financial data.

Copy trading

Copy trading allows you to piggy-back the trades of more experienced traders.

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 model has proven so popular that most brokers now offer it in some form or other. If you’re thinking of going down this route there are several brokers that have copy trading services. eToro’s service is one but there are many others to choose from.

Forex signals

The second way to profit, if you don’t want to trade yourself is to use a forex signal. Forex signals are buy/sell instructions generated by a human trader or more often these days, a software program. They are then sent to receiving clients or followers. These buy/sell orders are then replicated on the client’s account.

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 range of forex signals, partly through their large 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 are automated programs that work within trading platforms. While signals are received externally from a third-party provider, an “Expert Advisor” is software that runs locally on your own trading platform.

The software generates 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 between fully automated signals and trading on your own.

Warning: There’s a vast marketplace of commercial forex software out there. Unfortunately, much of it is useless. Claims about returns, and historical performance data have to be examined carefully and analyzed along side risk and leverage being utilized by the program.

The best forex robots can be highly profitable. But the better they are, the more costly they will be.

Software is not a substitute for human experience. You’ll still need to operate the program and choose a suitable market to run it on.

Technical Trading

Foreign exchange is predominantly a technically driven market. This is one reason why many newcomers are attracted to it in the first place. 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. In commodity futures and forex markets, some technical trading strategies can deliver strong and consistent profits over the long term.

Common indicators used by technical traders include:

For more on technical trading see here.

Risks of Using Only Charting

There are also fundamental forces at work in the currency markets. These inlcude:

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

Traders who use purely technical systems run the risk of being on the “wrong side” of important economic events. When important data is released and is not in line with market expectations it can cause big price shifts.

For this reason, many technical traders avoid holding positions during important economic releases. This point is also worth bearing in mind if you’re using automated trading signals.

Keep in mind that the more basic software will usually only use technical indicators.

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 people trying to do exactly the same thing as you are. Staying one step ahead of the game is critical to success.

Turning online trading into a profitable career takes time, effort and commitment.

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