What is Forex Trading System

Whether we make our living from the forex or dabble as a day trader, emotion will unwittingly influence our trading decisions. Unless kept in check, ego, fear, denial, greed or wishful-thinking can all conspire to seriously – and expensively - erode our performance.

No matter how disciplined and logical we may believe we are, the cold emotionless decision-making process of a forex trading system is far more likely to avoid losses than a human counterpart unconsciously driven by gut feelings, hopes, fears or hunches.

But what is a forex trading system?

Essentially, it is a web-based application that automatically generates buy and sell instructions according to pre-set parameters. These parameters establish all the timings for market entry and exit, profit targets and loss limits. Typically, they will calculate the funds necessary for current positions and check margin availability prior to executing or holding a trade during adverse market conditions.

Of course, some forex trading systems are more sophisticated than others. The more advanced trading systems analyze historical price data as well as real time price movements to produce entry and exit signals. Depending on the individual system, an array of data may be crunched behind the scenes. This data can include such variables as price patterns, price relationships, momentums and a host of other indicators.

Generally, though, the forex trading systems fall into the following three broad categories:

Long Term — Trend followers which go with the direction of the trend and hold positions until there’s a reversal. Long term outlook can be as long as 12 months with trades held as long as possible.

Mid Term — On average, trades will be held for around a month or so while the mid term system attempts to get the best of both worlds by following the pattern of crests and troughs in the market.

Short Term — The outlook is usually no more than a few days hence and trades are aimed to capitalizing on daily movements.

You should, however, be aware that there are risks associated with web-based trading systems. Back up measures help minimize system downtime, but there still remains the possibility of hardware and software failure, either yours or the trading system’s. Moreover, there’s the real risk of an internet-routing outage disrupting the service, so ensure your trading system allows telephone trading.

In an environment where logic and educated guesswork are the major elemental forces at work, there’s little prima facie room for emotion to enter the equation in the global money markets.

And nowhere is this truer than in forex trading where gradual and predictable change is a scare commodity. Price values in the forex are more akin to riptide undercurrents - swift and strong – than a lazy tidal river.