Trading Systems

Before going into trading systems, we should analyze the basics of the claim that Forex trading may be profitable. So, is Forex trading like betting? Should the answer be yes I would have to recommend you to keep distance from it. And yet, most people losing money in forex are indeed betting. More than that, it is true that most people trading forex loose money. Therefore, most people see forex in a way that does not differ a lot from lotto.

Even if you accept that traders have 1 in 2 chances to win (50% chances), and therefore you accept that their margin will tend to remain unchanged in time, this will not hold true due to the fact that traders also pay the brokers’ fees (which is the pip spread between ask and bid, among others) and make human errors which will erode their margin.

So, in order to be a successful trader you need that the odds are better than 50%. This is the paradigm of forex traders, to be able to predict trends with accuracy better than 50% in order to profit from the trends. By the way, this is the only way to profit in Forex, due to the size of the market, we, individual traders, have absolutely no influence whatsoever on market trends. Like surfers, we may only take the waves in our advantage and surf the market or otherwise be hit by a wave going against us if we enter the sea in the wrong direction.

As happens in stock trading, two types of analysis are used for Forex: Fundamental analysis and Technical analysis.

Fundamental analysis
Fundamental analysis is based on several factors influencing the strength of currencies like a nation’s industrial indexes, a nation’s debt, uncertainty due to oil prices movements, employment, uncertainty due to possibilities of war, political events and so on.

These events have a huge impact on forex trading, but we can hardly know before hand if their impact will be positive or negative for a given pair. We generally also will enter trade too late after these events, when market movements have already happened. People trading around the release of economic news like the release of unemployment indexes are speculating, they are said to be trading the news. Fundamental analysis is not useful at the level of individual traders, at our level it is closer to betting than to science.

Technical analysis
Is the study of trends through charting of the trading currency pairs over time and the early detection of trends in order to join the trend and get out before its reversal, thus profiting from it. This early detection of trends is called a signal and in the best of the cases it is said to increase the win/loss ratio to some number between 60 and 80%. Several systems claim to produce signals with great accuracy. Should this be true the answer to the question whether forex trading is profitable should be YES.

Technical analysis is probably the only useful tool for individual traders, and most trading systems are based on it.

Several trading systems exist:

Manual News trading: reviewed previously, based on lots of speculation better go and trade the lotto, unless you have secret information that we common people do not have.
Manual erratic trading: in accordance to the trader’s emotions / feeling / horoscope / whatever, leading always to loss. Sadly a lot of Forex traders use it (even if they don’t notice it).

Mechanical trading: several systems have been released based on algorithms which require the fulfilling of certain conditions/criteria in order to open a particular trade, as well as other criteria to close it. These systems use to be time consuming and in most of them the trader has to spend a lot of time monitoring the forex market (i.e. in front of the screen).

Automatic signaling: A refinement of mechanical trading in which the trading algorithm (the search for conditions and criteria) is managed by a computer program which tells the user when to open a trade, if he should go long or short and when to close. This is also time consuming and the trader is not relieved from the time spend in from of the screen.

Automatic Trading: Performed by programs which generate their signals like in automatic signaling described lines above, and in addition are able to execute the trade on behalf of the user, automatically, both opening and closing. These programs are called robots (Expert Advisors according to the name given by the most popular forex trading interface, Metatrader). These robots have a number of parameters that let the trader define the risk, size of trading, and other issues. The development of these programs at the commercial level is a very new and hot phenomenon, and as programs become more sophisticated, will probably dominate the market in the coming years due to their advantages (can be left alone, eliminate human emotions which are responsible for most of the loses in forex). So the only remaining question is, do robots really work?, Are they profitable? Well, you have to go to www.forex-robots.com to find it out.