The commonly used terms, strategy and system, aren’t unique to currency trading, but they’re certainly significant. They both enable traders to make wiser decisions and when used—and used well—they can make the rocky road to success a much smoother ride.
What is strategy?
A plan. A tactic. A method. An approach.
Originally a military term, the word strategy is defined as the art or science of planning and conducting a war. Outside the military, however, it’s basically a plan with regards to anything. And, in business or politics in particular, it’s usually a plan for success.
In currency trading, the latter is without doubt the more appropriate definition.
Currency trading strategies are made up of a set of rules from which a disciplined trader does not deviate.
Too many times traders are governed by their emotions when trading. Whether the market is sinking or soaring, emotions are involved. It’s been said that most human behavior is driven by feelings. And, feelings such as greed or frustration can have a hugely negative effect on our lives—sometimes leading us down a path of self-destruction.
The rules of a trading strategy keep the trader from straying as well as keeping human emotions in check. A strategy is a trader’s necessity.
Strategies are created from a variety of studies—historical analysis called backtesting, real world market analysis called forward testing, and/or the correlation of both. Of course, testing is no guarantee to the successful performance of the strategy, but the knowledge that went into creating the strategy is a positive boost to the trader’s confidence and also helps to reduce frustration.
Trading strategies can be managed and executed using what’s called trading systems. Read on.
What is a system?
A group or combination of elements forming a collective entity.
It seems that there is more than one origin to the term system. From the early 1600’s, it’s been used in reference to many things: whole creation or the universe; organized whole or body; together; an arrangement; a set of correlated principles or facts; denoting a result of action. All of these origins came to be the meaning we know today.
Replace the term “elements” with “strategies” and you’ve got the currency trading definition. Hence, a group or combination of trading strategies forms a trading system.
Trading systems manage and execute trading strategies. Plus, all of the testing that was mentioned earlier with regards to strategies can also be done from within these systems. Very convenient.
There are many factors that need consideration when creating and using trading systems…
Typically, there are two trading systems used by traders: an AE (auto-execute) system which uses a trading platform to automatically execute trades without the intervention of the trader; or, a non-AE system that is not in sync with a trading platform.
Additionally, there are several types of trading systems that can be created such as short-term, day trading, long-term, multiple currencies, multiple timeframe, etc.
And, backtesting—or any form of testing—well, that’s an entirely different article.
Despite all that trading systems involve, using trading systems can actually be a huge benefit to a beginner trader. Though if they are followed blindly and not understood, they can they can be disastrous. When a system works, it can provide a track record of performance giving the trader confidence to trade the system in the market. When a system works against the trader, it provides signals that ultimately end in loss, also known as drawdown.
In trading, you need education and experience. And, responsible forex traders get educated.
If you are interested in using trading strategies and systems, take the time to learn how the market operates and how to use these powerful trading tools properly and effectively. Attend a complimentary webinar by completing the form below.