Forex Trading Systems: Understanding Discretionary and Mechanical Systems

By John Eather

There are two basic types of Forex trading systems, termed mechanical and discretionary systems. Mechanical systems provide trading signals that are based on systematic data analysis and other technical analyses. Discretionary systems, on the other hand, use factors that are harder to quantify, like trader experience, and gut feelings about entries and exits. Which one brings better results? And, more importantly, which one best fits your trading style? Let's begin by evaluating the pros and cons of each system.

Advantages A mechanical system is able to be entirely automatic and backtested for efficacy. It engages fast rules and info. Mechanical traders are apt to focus less on hunches than discretionary traders.

Disadvantages Almost all traders backtest Forex trading systems inaccurately. In order to develop accurate final results, tick data is required. Even so, the Forex market is constantly in motion and has a fair amount of unpredictability. Market circumstances might appear alike to a backtest scenario, but they're never precisely alike. A trading strategy which was flourishing the year before can't be promised the same level of success this year.

Advantages Discretionary systems can easily adapt to new and changing market conditions. Trading decisions are based on experience, and traders use their background knowledge to determine which trading signals yield a higher chance of success.

Disadvantages Discretionary systems don't allow backtesting or automation, as making a decision asks for a real person to canvas the market conditions. Time is compulsory to lay down the experience level essential to attain success entering trades reliably. This has a propensity to be precarious in the beginning.

So, which system is best for Forex traders? The best system is the one that suits your preferences. If you have difficulty following your instincts, then you may fare better with a mechanical system. This will eliminate the need to apply your judgment; you simply accept the trades signaled by the mechanical system.

Also, if you're paralysed by the uncertainties and emotions that beset a lot of traders, you'll also be better off with mechanical systems, since you are able to just follow what the system shows without being overpowered by your own mental barriers. There will be no more mental anguish over whether to go short, go long, close or open a trade - the mechanical system will indicate this for you.

However, if you've enough self discipline, it'd be better for you to employ a discretionary system. This will allow the most flexibility in adapting to market conditions, and you will be able to easily adjust your trading strategies as the market develops. For instance, if you've a goal of 50 pips on a long trade but the market starts to quickly move up, you have the option to set your strategy to take profit at 90 pips.

Prior to choosing whether a discretionary or mechanical trading system is good for you, there are a few significant points to deliberate. You'll want to be sure that the kind of Forex trading system you employ agrees your personality, or you will be always doubting your selected system.

You'll need to lay down some trading rules, and more importantly, have the discipline to stick to them. Take the time to develop the best system for you. This involves time and dedication, but if you do it properly, this will pay off in the long run. - 23222

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