Many forex traders seek automated trading systems. The idea is to put emotions behind and let robots execute currency trades. In this article, we discuss a forex trading system discretionary vs mechanical systems.
Discretionary forex trading systems
First, the discretionary trading system is a trade set-up. Generally speaking, it is composed of two parts.
One part is about the technical analysis. This is a set-up particular for each trader. Usually, it is composed of charts, moving averages, and oscillators (such as Relative Strength Index or MACD).
What the trader decides to use is based on his or her belief about which of these technical analysis tools are the best for guessing the trends of the currencies traded, and for the time period particular for each trader since different traders enter trades for different time periods.
There are day traders, swing traders (who enter trades for up to few days), and position traders (those willing to wait longer). So, the charts used by these various traders will differ. Day traders, for example, may look at one-minute charts the most.
The other part of the discretionary trading system gets a bit automated. Here, a trader may enter stop orders as well as limit orders. Stop orders protect trading capital from large losses, while limit orders automatically lead to an exit trade once a price of a currency reaches a desirable level.
Some online forex brokers offer trailing stops and limits where these orders will change their set up execution prices up after a market price change. To give an example, a trader may want to lock in a profit by placing a stop order. If the currency continues to rise (on a long position) the trader may want the stop to automatically rise. And that’s a trailing stop.
Mechanical forex trading systems
Some traders set up forex trading robots to execute trades for them. The set-up isn’t very simple and requires careful analysis of price actions and trends in currencies. Once a trader feels he or she has a grasp on how prices of particular currencies behave, the set up of a robot takes place.
What’s also important, when it comes to these trading systems, is account protection. Stops need to be placed to mitigate risk. Many traders also test the robots before going live to see if their assumptions are correct. Using robots is attractive for quantitative types, but it may not be for everyone.
It is advised that you only do it once you gain lots of forex trading experience as using robots can be bad for your account’s equity if the set-up is wrong.
As you can see, there’s a substantial difference between forex trading system discretionary vs mechanical systems. Still, both require good skills at forecasting.