If you have some capital and want to start profiting from the Forex market before becoming an experienced Forex trader, you can buy a proven system, written by experienced professionals.
There are two types of Forex trading systems, mechanical and discretionary. The trading signals that come out of mechanical systems are mainly based on technical analysis applied in a systematic way. Discretionary systems use the experience, intuition or judgement of the Forex trader for entries and exits. But which one produces better results? Or more importantly, which one fits better your trading style?
The advantages of mechanical systems are that this kind of system can be automated and back-tested efficiently as it has very rigid rules. Either, there is a trade or there isn’t. Mechanical traders are less susceptible to emotions than discretionary traders. As the name suggests, this way of trading is efficient as it detaches you from the risk associated with the inability to control your emotions which has proved to trip up even the most experienced traders!
The disadvantages are that most traders back-test Forex trading systems incorrectly. A poorly back-tested Forex system in addition to the fact that the Forex market is always changing, as it has a random component, makes market conditions look similar. A system that worked successfully the past year doesn’t necessary mean it will work this year.
In contrast, discretionary systems are easily adaptable to new market conditions.
Trading decisions are based on experience. Traders learn to see which trading signals have higher probability of success. As they cannot be back-tested or automated, since there is always a thought decision to be made this can be a disadvantage.
It takes time to develop the experience required to trade successfully and track trades in a discretionary way. At early stages this can be dangerous, which is why when using this method, a trading note book, paper trading first, then using a demo account to finally trade with a small amount of capital is the best way to progress.
Now, which approach is better for Forex traders? The one that fits better your personality. For instance, if you are a trader that finds it hard to follow your trading signals, then you are better off using a mechanical system, where your judgement won’t play an important role in your system. You only take the trades that your system signals.
If the psychological barriers that affect every trader (fear, greed, anger, etc.) puts you in unwanted scenarios, you are also better off trading mechanical systems, because you only need to follow what your system is telling you, go short, go long, close a trade. No other decision has to be made.
On the other hand, if you are a disciplined trader, then you are better off using a discretionary system, because discretionary systems adapt to the market conditions and you are able to change your trading conditions as the market changes. For instance, you have a target of 60 pips on a long trade. But the market suddenly starts trending up pretty strongly, then you could move your target to say 100 pips.
Does it mean that trading a discretionary system has no rules? No. Trading discretionary systems means that once a trader finds his/her setup, the trader then decides what to do. But every trader still needs certain rules that need to be followed, such as the size of the position, conditions that have to be met before thinking to get in the market, and so on.
Whether you choose to use a discretionary or a mechanical Forex system, you need to make sure the Forex trading system you are using totally fits your personality. You also need to have some rules and most importantly have the discipline to follow them.
Take your time to build the perfect system for you. It’s not easy and requires time and hard work, but at the end, if done correctly, it will give you consistent profitable results. The Forex market will be around for a very long time to come – it’s worth spending some time at the beginning to learn to trade well and choose the right Forex system which suits you.
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