Systematic forex trading systems refer to those trading systems where you place a buy and sell order based on some strict entry rules. The majority of these trading systems are coded into a script and make it easy for traders to use them on broker platforms. The opposite angle of this kind of trading is discretionary trading, where the trader enters buy and sell decisions without any specific rules. Typically, the discretionary trader alters his trading style as the market evolves while the systematic trader only follows those specific rules.
Benefits of using systematic forex trading systems
One of the major benefits of using systematic trading systems is that they help remove emotional decisions from trading. Since real funds are at risk in the markets, the emotions of fear and greed will always torment traders in their decision making. This can be dealt with to a large extent by using a trading system that will make all the trading decisions for you.
Another benefit of using strict trading systems is that the rules make it easy to automate trading. This allows trade orders to be automatically generated as long as the trading platform is up and running. This leads to faster execution and removes the possibility of missing out on trades due to second guessing, or hesitation. With automated order execution, it becomes very easy to enter positions that are short term in nature. For example, using a trading system that works well on the 1 minute charts manually will be very tiring and challenging, but it is easier when the system is automated.
Again, since the systematic trading strategies are often written in a programming language, it is easy to test them based on historical data. This back test ability is one of the major benefits of using this kind of strategy, as you can quickly see how well the strategy has performed in the past. This doesn’t guarantee future results, but it pays to know where you are coming from first. With the backtest, you will be able to evolve changes that will make the strategy better.
Most new traders are caught wondering if systematic trading can be profitable in the long run. The truth however, is that many commodity trading advisors and hedge fund traders have been able to bring about billions in terms of trading profits. These people control large funds and so their performance is audited regularly and so if systematic trading systems have worked for them, they can work for you.
Challenges using this kind of forex trading system
Apart from the benefits of systematic trading, there are several risks to it as well. The major risk lies in selecting a trading system that was poorly designed. Now, a trading system can be poorly designed due to several factors. For instance, it may be poorly designed because it was curve fitted excessively to fit the market. It could also be that it was based on unrealistic assumptions. It could equally be that the risk management mechanism is not adequate at all. Choose your systems selectively and test well on a demo account.