February 9, 2014

Mechanical or Discretionary Forex Systems?


A trader is only as good as his weakest tools and this is a saying that is applicable to all types of trades including forex trading. On the foreign exchange, because there is so much unpredictability and volatility, you have to be completely sure of each and every one of your presumptions about the market and actions in the market.

This is why you have to take all the tools you trust and weave them into a tapestry that will give you a window into the trends and patterns that exist in the forex market. This tapestry is nothing but the trading system you create or adopt.

There are mainly two forms of systems that you can use to gain insight into the market and determine your actions in it. These are the mechanical and discretionary forex trading systems.

The Difference between the Two Systems

Mechanical forex trading systems are basically systems with strong rules and conditions which a trader must follow to make sure that he makes profits. Discretionary trading systems, on the other hand, leave things open to the trader’s interpretation at various crucial points. Therefore, it can be said that while the former system is mainly objective and limiting, the latter is subjective and more open to interpretation.

Starting with Mechanical Systems

New forex traders are almost always advised to trade in the market with mechanical trading systems because the use of discretionary systems requires some experience in the market. Furthermore, the unmoving nature of mechanical systems also means that there is less room for a new trader to make mistakes in the market if he uses them.

Graduating to Discretionary Systems

However, sooner or later, a trader will have to move onto discretionary forex trading systems because these systems are more advanced and adaptable to changing conditions in the market. As conditions on the foreign exchange change very quickly and frequently, discretionary systems tend to be more suitable for large target trading.

Considering Your Level of Discipline

If you are still undecided about whether to choose discretionary or mechanical forex trading systems, then one of the things you must consider is how disciplined you can be.
Discipline is important with discretionary systems because they are more open to modification and impromptu decisions. If you are unsure of how disciplined you can be then you will do better with mechanical systems.

Evaluating Your Emotional Control

Your emotional control should also be something that you consider while choosing between discretionary and mechanical forex trading systems. The reason for this is that the market will always test your ability to remain neutral and composed and if you are using discretionary systems but cannot maintain objectivity then you will start incurring losses.

Your emotions, on the other hand, play little to no part if you are using mechanical forex trading systems to decide how and where to place your trades. Basically, if your mechanical trading system gives you a trade to follow then you follow it otherwise you stay out of the market. Thus, there is no step where your emotions might affect your decision making process.



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