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Here are some key factors to keep in mind when using trading systems in the FOREX.
Any forex trading system should encompass these functions:
a trend filter to identify developing trends (short, intermediate, long) and their direction (upwards, downwards, sideways).
an entry system to generate signals based on various technical indicators (such as moving averages and chart breakouts)
an exit formula to generate exit orders (profit-taking and/or stop loss) before a trade is entered.
money management principles to determine how much your trading account is risked per trade. Don't trade several currency with little capital. Don't over trade. A good trading system with no money management principles in place will not produce consistent or lasting returns.
A trading system should consist of objective and mechanical trading rules, with technical indicators as building blocks. It is important to back-test and forward-test your system before using it in the market.
What are some trading system pitfalls to avoid?
Systems are only as good as the user.
Even though trading systems by themselves are objective and mechanical, some traders still lose objectivity when interpreting and implementing signals. Many feel compelled to trade instead of waiting for a signal. Personal discipline is a must.
Systems are not tested on sufficient data.
You need to test your trading systems over a long time-frame and within different types of trading markets. You should also forward-test systems in real time.
Systems are often over-optimized.
They start asking the what-if question and back-test the trading system with different parameters. Of course they are going to trade with the parameters which generate the highest amount of wins. However, in real time these over-optimized systems rarely perform well.
What about purchasing commercial trading systems?
Be skeptical of posted results. Why would someone sell a profitable trading system instead of using it himself? With dedication and research, you can develop your own trading system.
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