A trading system is an algorithmic methodology of trading the currency markets as it is majorly based on following simple set of rules for generating buy or sell signals. It is a mechanical or structured approach towards trading, hence it removes the herculean task of predicting price movements in the market.
You generally find that a lot of systems are things that people have coded into expert advisors (EA’s or robot) to make trading simpler for them. The signals generated from a trading system are mostly from technical indicators or combinations of technical indicators. The primary aim of a trading system is to manage risk and to increase profitability in any market environment.
Most of the trading decisions required to place trades are predefined by the rules of the system. Usually the system would have been tested over many years and in many different market environments. Using a trading system doesn’t require any market analysis as a lot of factors are not considered before making decision.
Trading factors like whether the market is overbought or oversold, resistance, support, demand or supply zones, candle stick formation or patterns, fundamental news release do not matter at any given point in time the system provides a trading signal. All these restraining factors makes no sense to a system trader because he has back tested and also traded his system in all kinds of market scenario with a positive result. A trading system most times have a fixed risk to reward ratio and money management.
Trading systems were originally developed to erase emotions in traders mindset and save the concept of ‘analysis paralysis’ in trading. Developing a trading system could be time-consuming and strenuous, however once it is established a trader’s performance can improve drastically. Emotion is often cited as one of the biggest flaws of individual investors.
Investors who are unable to cope with losses second guess their decisions and end up losing more money. By strictly following a pre-developed system, system traders can forgo the need to make any decisions; once the system is developed and established, trading is not empirical because it is automated. By cutting down on human inefficiencies, system traders can increase profits.
Developing an effective trading system is by no means an easy task. It requires a solid understanding of the many parameters available, the ability to make realistic assumptions, the time and dedication to develop the system. However, if developed and implemented properly, a trading system can yield many advantages. It can increase efficiency, free up time and, most importantly, increase your profits.