Backtesting Forex
Forex Trading System: Mechanical vs. Discretionary
There are basically two types of trading systems currency, and discretionary systems mechanics. The trading signals that come out of mechanical systems are based primarily on technical analysis applied systematically. On the other hand, discretionary systems use experience, intuition or trial on the inputs and outputs. But what produces better results? Or is it more important that one best suits your trading style? These are the answers we will try to answer in this article.
Us will examine the pros and cons of each system approach.
Mechanical Systems
Advantage
This type of system can be automated and backtested efficiently.
It has very rigid rules. O There is a trade or there is not.
Mechanical traders are less susceptible to emotions than discretionary traders.
Disadvantages
Most traders backtest Forex trading systems incorrectly. In order to produce results you need to make accurate data.
The Forex Market is always changing. The foreign exchange market (and all markets) has a random component. The conditions market may seem similar but are never the same.
A system that worked successfully last year does not necessarily mean that work this year.
Discretionary systems
Advantage
Discretionary systems are easily adaptable to new market conditions.
decisions trade are based on experience. Traders learn to see which trading signals have higher probability of success.
Disadvantages
They can not be backtested or automated, since there is always a decision you think he did.
It needs time to develop the necessary experience to successfully negotiate and follow a discretionary trades. In the early stages this can be dangerous.
Now, which approach is better for Forex traders? The one that best fits your personality. For example, if you are a trader who finds it difficult follow your trading signals, then you are better off using a mechanical system, where his ruling will have an important role in your system. Only take trades system signals. style = "mso-spacerun: yes">
If the psychological barriers that affect every trader (fear, greed, anger, etc.) puts you in unwanted situations, is also in a better position mechanical trading systems, because you just follow what your system is telling you the open, go long, close a trade. No other decision has to be done.
In addition, if you are a disciplined trader, then you are better to use a discretionary system, because discretionary systems adapt to market conditions and are able to change your trading conditions as the market changes. For example, you have a goal of 60 pips on a long trade. But the market suddenly starts increasing trend strong enough, then you can take the target of say 100 pips.
Does this mean that trading a discretionary system has no rules? It is absolutely incorrect. Trade discretionary systems means that once a merchant is on your configuration, the merchant decides what to do. However, every trader still needs certain rules to follow, such as the size of the position, conditions to be met before thinking to get in the market, and so on.
I am a discretionary trader. The main reason I chose a discretionary system is that my trades are based on price behavior, and as you know, the price behaves similar to the past, but it is never identical, therefore the outcome of every trade is unknown. However, I have rigid rules my system, certain conditions must be met before even thinking about getting into a trade. This keeps me out of trouble, once my setup is present and in accordance with established rules, then you should monitor closely the price behavior and finally decide whether it is a good opportunity or not.
If you choose to be a discretionary or a mechanical trader there are some important points to consider:
You need to ensure that the Forex trading system you are using totally fits your personality. Otherwise you will find on your outguessing system. It is also necessary to have some rules and most importantly have the discipline to follow them. Take time to build the perfect system for you. It is not easy and requires time and hard work, but in the end, if done correctly, you will consistent results profitable. Before going live, try it on a demo account or even a small account (I will go for the second option, since psychological barriers will present.) About the Author
Raul Lopez is a full time Forex trader and founder of http://www.straightforex.com a high quality Forex training company.
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