An Introduction To Trading Systems
Whether you plan to venture into, foreign (forex) or stock exchange, trading systems will help you become successful in this endeavor. But before proceeding, it is vital first to understand what they are and how they function.
Trading systems pertains to specific rules or parameters that determine points of entry and exit, called signals, for a given equity. They are often indicated on a chart in real time and prompts immediate implementation of trade.
In the construction of trading system parameters, the most common technical analysis tools consist of moving averages, Bollinger bands, stochastic, relative strength, and oscillators. Most of the time, a combination of these tools determines a rule. However, there are also instances wherein only one indicator is used in rule creation.
Benefits of a Trading System
Utilizing a trading system provides several benefits to a forex or stock market trader.
Can Increase Profit
Coping with losses is one of the most challenging aspects of being in a forex or stock exchange market account. To recover the money they lose from trading, investors usually make hasty decisions and consequently lose more money in the process.
Since most of these systems are automated, there is no need for the investor to plan, as it is the software that determines when to enter and exit trading. By doing so, losses will be minimized, and there is a greater chance of increasing profits.
Not Time Consuming
Again, since most systems are optimized and automated, the trader need not exert a lot of time analyzing and initiating trades. The system is designed to both generate the signals and perform actual trade.
More Convenient Because They Have Been Optimized By Others
There are a lot of systems that have been developed and currently being marketed. However, availing of the work of other people entails payment of a specified fee. However, you need to be careful when choosing a company because many of them are fraudulent.
Pitfalls of Trading Systems
While they may have their advantages, trading systems are not perfect and present their own disadvantages.
This is the most significant disadvantage of a trading system. Creating a trading system may require a solid knowledge of technical analysis, the ability to decide empirically, or a comprehensive understanding of the functions of parameters.
While you may not be involved in the development of the system, familiarization with the parameters can be equally challenging.
Requires Realistic Assumptions
For a system to become active, you need to have knowledge of how to differentiate simulated from actual results. This is known as “slippage” and represents one of the major pitfalls in the effectiveness of a system.
Development Takes Time
The task of developing your own system is time-consuming. Getting it to run and work effectively as well as testing it may take some time. Not to mention the fact that you have to make a paper trade in real time to make sure that your system is reliable. The factor of slippage may also come into play, which will require you to revise your system completely.
As mentioned above, you need to be careful when choosing a system. Some firms are out to get your money and offer a system that does not work. However, there are likewise legitimate companies so you should determine the difference between the two.
A trading system can be a helpful tool for novice traders who want to succeed and make a living out of this endeavor.
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