FOREX Trading Systems

As i mentioned in a previous post, trading systems are not nearly as important as your mind-set and ability to manage your risk. But make no mistake, you still NEED a system! A proper mind-set and good risk management are meaningless without a system to apply them to.

In layman's terms, all a system is is a methodology on which you decide when to get in and out of trades. It is meant to keep your decision-making process as step-by-step as possible. So how do you build one?

If you're doing your recommended reading, you have most definitly come across different possibilities on which you can build one. Some swear by fundamental analysis, where, in a nutshell, you spend your time analyzing various components of the economy to come up with a decision on how to trade certain currency pairs.

More likely though is that you are reading alot about technical analysis, which essentially operates on the assumption that history tends to repeat itself. Historical prices tend to form patterns that can be used to establish a probable future direction.

There will forever be a battle between the fundamentalists and technicians as to which is better, so let me get it out there now...In my humble opinion, fundamental analysis is completely unnecessary for you to succeed. That's not to say you cannot incorporate it into your arsenal at some point but i know many successful traders who don't bother with it at all.

Fundamentals don't move markets, people do. And people are emotional creatures each with their own unique interpretation of data. It is technical analysis that captures this emotionality so i will focus on this for purposes of helping you establish a system.

If you've read any book on technical analysis you surely must be going crazy by now trying to figure out which indicator to use. Do you use one or a combination? What's better: MACD, RSI, Stochastics, moving average crossovers? Should i trade price ranges or should i try to catch the big trends? Should i take small but frequent profits or should i go for the homerun trades?

I can certainly understand how you can get lost in it all. And it's too easy to get ahead of yourself, seeing dollar signs next to every new indicator that's discussed. So, slow down for a moment and take the time to reflect on a few things that the technical books might not have mentioned:

First, recognize that the act of trading should not be difficult. Learning and preparation take time but when you are ready to trade, it should be easy as pie. And the only way it can be easy is if you accept that trading has to work around your schedule. You cannot alter your life to accomodate trading because it will consume you. So, if you have a full time job then it is unlikely you will be able to day trade, in and out of the market all day long. Time frame is crucial. Trade a time frame that makes sense to your lifestyle. There is a method out there for everyone, but it has to fit YOU!!

Second, know your strengths and weaknesses as an individual. As ridiculous as this sounds it will have a profound impact on which system you ultimatly settle on. For example, if you are a patient and conservative type of person, then you are not likely to select a system that involves hugely volatile movements. It would drive you crazy and you would not be able to see your plan through.

Do not judge the merit of a system based solely on the bottom line. It has to feel right and fit your unique personality IN ADDITION to being profitable.

Alas, this sometimes takes some experimentation with different systems but you keep these things in mind and you will find it.

In the next post, i will try and cut through all the fog with a method of trading that can fit just about everyone. In the mean time, i'd like to recommend the following reads. It captures the essence of what i am saying in this post 10-fold that every great trader always has a system that fits with their personality.

Please do not take this topic lightly as it all falls back to trading with a proper mind-set