Whether you plan to venture into foreign or stock exchange, trading systems will help you become successful in this endeavor. But before proceeding, it is vital to first have an understanding of what they are and how they function.
Trading systems pertains to specific rules or parameters that determines 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 a trade.
In the construction of trading system parameters, the most common technical analysis tools consists 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 difficult aspects of being a forex or stock exchange market. In an effort to recover the money they loss from trading, investors usually make hasty decisions and consequently loss more money in the process.
Since most of these systems are automated, there is no need for the investor to make a decision, 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 for 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 certain 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 biggest disadvantage of a trading system. Creating a trading system may require a solid knowledge of technical analysis, 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
- In order for a system to become effective, 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 do 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 completely revise your system.
As mentioned above, you need to be careful when choosing a system. There are firms that are out to get your money and offer a system that does not work. However, there are likewise legal companies so you should determine the difference between the two.