Forex Trading Systems: The Ins and Outs of Discretionary and Mechanical Systems
There are two basic types of Forex trading systems, termed mechanical and discretionary systems. Mechanical systems provide trading signals that are based on systematic data analysis and other technical analyses. Discretionary systems, on the other hand, use factors that are harder to quantify, like trader experience, and gut feelings about entries and exits. Which one brings better results? And, more importantly, which one best fits your trading style? Let's begin by evaluating the pros and cons of each system.
Advantages A mechanical system can be fully automated and backtested for efficacy. It uses fixed rules and data. Mechanical traders tend to focus less on gut instinct than discretionary traders.
Disadvantages Just about all traders backtest Forex trading systems wrongly. In order to acquire correct outcomes, tick data is needed. However, the Forex market is perpetually in change and has some amount of volatility. Market circumstances may appear similar to a backtest scenario, but they are never exactly the same. A trading strategy that was successessful last year can't be assured of being fruitful this year.
Advantages Discretionary systems are able to easily reconcile to newly ever-dynamic market considerations. Trading conclusions are backed up by experience, and traders use their background knowledge to check which trading signals open larger chances of performing well.
Disadvantages Discretionary systems can't be backtested or automated, because reaching a decision requires a human brain to analyze market conditions. It takes time to build the level of experience necessary to achieve success in tracking trades reliably. This can be dangerous in the beginning.
So, which system is best for Forex traders? The best system is the one that suits your preferences. If you have difficulty following your instincts, then you may fare better with a mechanical system. This will eliminate the need to apply your judgment; you simply accept the trades signaled by the mechanical system.
Also, if you're paralysed by the uncertainties and emotions that beset a lot of traders, you'll also be better off with mechanical systems, since you are able to just follow what the system shows without being overpowered by your own mental barriers. There will be no more mental anguish over whether to go short, go long, close or open a trade - the mechanical system will indicate this for you.
Notwithstanding, if you've sufficient self-discipline, it'd be advantageous for you to apply a discretionary system. This will grant the highest flexibility in conforming to market conditions, and you'll be able to easily align your trading strategies as the market evolves. E.g., if you've a goal of 30 pips on a long trade but the market embarks on a faster move up than first anticipated, you've the alternative to correct your strategy to turn a profit at 50 pips.
Before deciding whether a discretionary or mechanical trading system is right for you, there are some important things to consider. You will want to make sure that the type of Forex trading system you use matches your personality, or you'll constantly be second guessing your chosen system.
You'll need to lay down some trading rules, and more importantly, have the discipline to stick to them. Take the time to develop the best system for you. This involves time and dedication, but if you do it properly, this will pay off in the long run. - 23159
Advantages A mechanical system can be fully automated and backtested for efficacy. It uses fixed rules and data. Mechanical traders tend to focus less on gut instinct than discretionary traders.
Disadvantages Just about all traders backtest Forex trading systems wrongly. In order to acquire correct outcomes, tick data is needed. However, the Forex market is perpetually in change and has some amount of volatility. Market circumstances may appear similar to a backtest scenario, but they are never exactly the same. A trading strategy that was successessful last year can't be assured of being fruitful this year.
Advantages Discretionary systems are able to easily reconcile to newly ever-dynamic market considerations. Trading conclusions are backed up by experience, and traders use their background knowledge to check which trading signals open larger chances of performing well.
Disadvantages Discretionary systems can't be backtested or automated, because reaching a decision requires a human brain to analyze market conditions. It takes time to build the level of experience necessary to achieve success in tracking trades reliably. This can be dangerous in the beginning.
So, which system is best for Forex traders? The best system is the one that suits your preferences. If you have difficulty following your instincts, then you may fare better with a mechanical system. This will eliminate the need to apply your judgment; you simply accept the trades signaled by the mechanical system.
Also, if you're paralysed by the uncertainties and emotions that beset a lot of traders, you'll also be better off with mechanical systems, since you are able to just follow what the system shows without being overpowered by your own mental barriers. There will be no more mental anguish over whether to go short, go long, close or open a trade - the mechanical system will indicate this for you.
Notwithstanding, if you've sufficient self-discipline, it'd be advantageous for you to apply a discretionary system. This will grant the highest flexibility in conforming to market conditions, and you'll be able to easily align your trading strategies as the market evolves. E.g., if you've a goal of 30 pips on a long trade but the market embarks on a faster move up than first anticipated, you've the alternative to correct your strategy to turn a profit at 50 pips.
Before deciding whether a discretionary or mechanical trading system is right for you, there are some important things to consider. You will want to make sure that the type of Forex trading system you use matches your personality, or you'll constantly be second guessing your chosen system.
You'll need to lay down some trading rules, and more importantly, have the discipline to stick to them. Take the time to develop the best system for you. This involves time and dedication, but if you do it properly, this will pay off in the long run. - 23159
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posted by X - Men @ 2:19 AM
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