subject: Defining Forex Trading System [print this page] 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.
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.
Which type of chart to use is largely a personal decision. Some traders prefer the simplicity of the ever-popular line chart. Other types of charts are pie charts, bar charts and candlestick charts. Candlestick charts are used by a large number of traders since you can get such a vast amount of information from a chart that is so easy to comprehend.
Whether a trader uses technical indicators or fundamental indicators will largely depend on the time frame in which he trades. Long term traders tend to favor fundamental indicators, such as profit levels, inflation rates and interest rates. Technical indicators are used more often by day traders. These include Momentum oscillators, Trend Following Indicators, Bollinger Bands and moving averages.
The reason why your trading plan should incorporate a stop loss level is to prevent your account from being wiped out by a large loss. Unless you are a highly experienced trader with incredible self discipline, you should never trade without a stop loss. Make the stop loss level sufficiently large to allow the market its usual ups and downs, yet small enough to prevent big losses on a single trade.
The take profit level serves a very similar purpose: it forces you to remain in a winning trade long enough to allow it to reach its potential. Without that, fear might cause you to exit winning trades long before they reach maturity.
A good trader will also choose one or two currency pairs and concentrate on them, rather than try to be master of all currencies. His forex trading system will also include rules as to lot sizes and how often he trades. Overtrading is a serious error made by many novice traders. If their trading system guided them in this regard, it would not happen so often.
