Learning Forex : Choosing the Right Trading System

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.

Most experts agree that those who find a winning trading system early on are far more likely to succeed and become profitable than those who don’t. In this short post we’ll look at some of the factors to consider when deciding on a trading system.

The Challenges

Although trading forex isn’t technically difficult compared to some other markets, there is a vast number of variables that impact foreign currency exchange rates (see Figure 1).

These influences can make returns from any trading system highly volatile and difficult to forecast. A strategy that works well in one type of market may be loss-making in another.

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.

Whether or not you become a profitable trader can be down to your ability to comprehend these factors. More importantly, if you are able to turn your insight into a trading system that works for you.

While it’s impossible to predict someone’s abilities or dedication to task, what’s clear is that those who find a good system are more likely to succeed in the long run than those who don’t.

Before embarking on a trading career, it’s worth spending a few moments to do a reality check:

  • Are you able to spend hours monitoring the 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? Any money put into trading is “capital at risk” – it should be 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 potentially profit from the currency markets.

Copy trading

Copy trading is 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. It allows you to piggy-back the trades of other, hopefully more experienced traders.

It can help you to understand the terminology and risks involved without having to make trading decisions yourself.

The copy trading model has proven so popular that there are now many brokers and service providers to choose from. If you’re thinking of going down this route then this page on copy trading services has some more details.

Forex signals

Another way to access trading systems is through signals. Forex signals are buy/sell instructions generated by a human trader or more usually a software program. They are then sent automatically to receiving clients or followers.

These buy/sell orders are replicated on the client’s account to mimic the trading strategy of the source.

Expert advisors

Third and finally there are expert advisors. These are automated programs that run within trading platforms. While signals are received externally from a third-party provider, an “Expert Advisor” is software that you can run your self.

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

There’s a vast marketplace of commercial forex software out there. However, all such systems need to be treated with caution. Claims about returns, and historical performance data have to be examined carefully and analyzed along side risk and leverage being utilized by the program.

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.

If you cannot find a system that meets your needs exactly, you can always make your own using one of the online services that are available.

Technical Trading

Unlike trading stocks or bonds, when trading forex, you don’t have to scrutinize earnings reports, balance sheets, cash flow statements, business strategies and so on. Foreign exchange is a technically driven market. This is one reason why many are attracted to it in the first place.

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. Committed 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.

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

Pure chartists 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

Systems that 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 systems 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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