A Forex trading system is defined as being a group of specific rules or parameters used by traders to identify entry and exit points to trade.
Incorporated with money management and automated trade placement with your broker, the Forex trading system can be completely automated. Most Forex brokers offer MT4 (meta trader 4) platform in which to trade, making it possible for anyone to create a winning system, and put it on autopilot. And if making your own system sounds like too much pain and hard work, you can simply buy one (or a few) of the many automated Forex trading systems that are available for purchase and download. These are generally known as Forex Trading Robots.
Unfortunately, if you plan on relying on someone else’s trading system, then your fate, (or at least the fate of your account) will be completely in the hands of a complete stranger! You would want to make sure they know what they are doing and have covered all the necessary parameters in their trading system.
At the very minimum, the Forex trading system should include:
1. Entry rules that provide a high probability of choosing the market direction correctly.
2. Exit rules that convert the high probability entries into ‘money in the bank’.
3. Sound money management system.
1. High Probability trading is only the start of a well oiled Forex trading system… NOT the be all and end all… Yes it is important to have a system that can trade successfully but it is not necessary to have all your trades as winners.
It isn’t even necessary to have most of your trades as winners. Given the laws of probability, it is highly likely that given enough trades, you will choose the direction correctly 50% of the time. I know traders that choose the direction correctly less than 40% of the time, but still have a trading system that returns a profit in the long run… and if you’re wondering how still, read on for more insight.
2. Exit rules… now this is the second most important part of your winning Forex trading system. Once you’re in a trade, knowing when to exit. You see, in an ideal world you would want to leave your trades on long enough to capture the majority of the move on winners, and get quickly out of losing trades. If you can do this, then you’ll be well on your way to having a Forex trading system that defies the odds that 90% of all traders will lose all their accounts… And accounts of $1000 or less will be wiped out within the first 3 months!
But doom and gloom aside, knowing your exit strategy before you enter a trade is a very important part of any successful trading system. If you could let all your profits run until the move is finished, and all your losses cut short and sweet, you will be well on the way to making a fortune trading the markets.
3. Money management. A parameter of this importance seems to be a bit out of place at the end of an article! But your ability to impose correct money management strategies on your system will be the difference between success and failure, rags and riches, extreme wealth and extreme disappointment. To define exactly what a good money management system is beyond the scope of this article, but needless to say, I recommend that you start creating your system based on money management, and not entry points (like so many terrible Forex trading systems do).
The biggest disappointment in the Forex trading business is seeing the high number of automated trading systems (Forex robots) that are based solely on entry and give little thought to making an algorithm that is sophisticated enough to let profits run and cut losses short. And most give little recognition to the fact that it is money management skills that turn in the profits in the long run.