What Type Of Forex Trading System Is Best For You?
By: Alex Harper
Submitted: 2010-12-30 21:14:38 | Word Count: 492
There are a variety of forex systems to choose from. For starters, there are systems which you follow where the rules are 100% defined (black box) and there are systems where the rules are not completely defined (discretionary).
The most classical types of systems are:
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*Trend Following
*Counter Trend
*Scalping
*Position Trading
*Basket Trading
Trend following is a very popular and classical type of forex system. You have probably heard the saying "The trend is your friend" or the full version "The trend is your friend until the bend in the end". Trend following systems usually have a lower win ratio but have a higher reward to risk. For example, let's say a trend following system only wins 40% of the time but wins 100 pips for every 30 risked. That means that over 100 trades, you would have lost 1800 pips (60 trades x 30 pips) and gained 4000 pips (40 trades x 100 pips) for a net gain of 2200 pips.
Counter trend trading is another popular strategy. These systems usually look for moments when the trend has a pull-back. These systems can be riskier as you are trading against the main trend, however if you have a high win rate and good risk to reward ratio they can be very popular.
Scalping is usually classified as trades that go for short profit objectives (ex: 20 pips or less) or trades that last a very short time (anywhere from a few seconds up to an hour). This type of trading is very popular for amateur traders as scalping generally provides lots of action and quick gains. It can be a very hard type of trading to master though. One of the downsides is that as you are only going for small profits, the spread that you pay to the broker becomes more significant. For example if you are making a trade on the Euro/Japan cross and pay a spread of 4 pips, to gain 20 pips you will need the trade to move 24 pips in your favor and will lose if the trade goes 16 pips against you.
Position trading is a popular strategy used by professional traders which involves holding trades for weeks or months. These types of trades usually take advantage of fundamental factors and the advantage is that you have large stop losses. The disadvantage is that unless you have a lot of money to trade with, it's hard to make significant gains per month.
Basket Trading is an advanced type of trading that involves making multiple trades and hedging against losses. This type of trading is also used by large companies that want to hedge against losses due to currency fluctuations.
Take the time to research the pros and cons of various systems so that you can choose which one will work best for you.
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