A Guide for New Traders: Using a Mechanical Forex Trading System
Foreign exchange, also called “forex” or “FX”, is a virtual global market through which currencies around the world are traded. It is the largest, most liquid market in the world in terms of total cash value traded. Forex trading is open to anyone—from companies to individual traders. But how to profit from it is a completely different story.
There are two basic types of trading systems used in the forex market: a discretionary system and a mechanical system. The two systems vary greatly as each caters to a specific group of traders. First time traders are better off beginning with a mechanical forex trading system.
A mechanical forex trading system uses a well-defined set of rules to determine entry and exit points in any given currency pair. This system requires very little effort on the part of the trader. Once the rules have been successfully established and optimized, the system will determine that trades are a clear “buy” or “sell”. All the trader has to do is follow the system.
Because of their use of rigid rules and guidelines, mechanical systems have effectively detached guesswork and emotions from forex trading. Things like fear and greed are some of the many common pitfalls of many novice traders, often leading to overtrading. A well-defined mechanical system allows traders to determine which trades to go for and when to go for them.
While a mechanical system is advantageous for newcomers, it doesn’t mean that seasoned traders can’t use it as well. A mechanical forex trading system can provide an objective standpoint which can help traders improve their strategies and management rules.
You need to understand that in spite of its usefulness, a mechanical system does have its limitations. Mechanical forex trading systems are vulnerable to changing market conditions. Because no set of rules, no matter how extensive, can cover all market conditions, there will be times when a mechanical system cannot provide optimum results.
New traders should start off with a mechanical system offered by companies such as Forex Malibu to develop the necessary skills and experience required in forex trading. Once this is accomplished, traders can move to more advanced forex trading systems, such as discretionary systems. Knowing the different systems will equip traders in dealing with unpredictable and volatile market conditions.