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Why A Trader Should Use A Forex Trading System
By John | August 25, 2010
A forex trader or currency trader is someone that is involved in the buying and selling of forex or foreign exchange. He does this for the same reason people trade in any other product: to make money. The question is how does a successful trader make trading decisions? Does he use his gut feeling? Certainly not; every successful trader follows a forex trading system. The forex trading system if used correctly can save lot of money and time for forex traders
Every great forex trading system incorporates a number of elements. This includes what type of chart the trader uses, whether he uses fundamental or technical indicators for his trading decisions, the stop loss level he applies to trades and the size of the take profit level he uses. A good trading system also includes guidelines on the currencies to trade, when to enter and exit trades, trading volumes and the frequency of trades.
The type of chart to be used is to a large extend a matter of personal preference. Many traders like the simplicity that a line chart offers. Many others will never touch a trade without first consulting their candlestick charts. This type of chart is understandably popular because of the amount of information that is provided in a very easy to interpret format. Despite this, many traders prefer pie charts or bar charts.
The time frame in which he trades will largely determine whether a trader uses fundamental or technical indicators. Traders who trade in a time frame of months or years prefer to use fundamental indicators like company profits, economic growth rates and interest rates. Day traders, for whom a few hours could be ‘long term’, usually prefer to use technical indicators such as Trend Following indicators, Momentum Oscillators, Bollinger Bands or moving averages.
The use of a stop loss level is vital in the prevention of huge losses. Unless you have many years of experience and a lot of self-discipline, your trading system should include a stop loss level. Without this you are bound to end up with a large loss sooner or later. The stop loss level should be big enough to allow the market to go through its normal ups and downs, yet not so large as to result in a devastating loss.
A take profit level serves the same purpose: it prevents you from getting out of a trade too soon or staying in it too long. If a trade is profitable, you get out as soon as the take profit level is reached.
The trading plan of a professional trader should also include the specific currencies he will be trading in. He will become an expert in those particular currencies, rather than someone who knows very little about all currencies. His trading system will also give him guidance about the maximum size of any individual trade and the maximum number of open trades at any given moment. This will help him not to overtrade.
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Topics: Trading |
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