Pros and Cons of Forex Trading Systems

Foreign Exchange Trading Systems

There are primarily two types of forex trading systems; one is mechanical trading system and the other is discretionary trading system. The trading signals that crop up from mechanical trading system are usually based on the technical analysis that is applied in an orderly manner. In contrast, the discretionary trading system is based on experience, judgment on entities as well as the institutions. Both the forex trading systems yield different results. However, mechanical trading system and the discretionary trading system have certain benefits as well as drawbacks.

Listed below are some of the benefits and drawbacks of mechanical and discretionary forex trading system.

Mechanical forex trading system

Pros

• Theses types of trading systems can be backtested and automated in an effective manner.
• They are based on very strict strategies, even if there is a trade or not.
• The traders who make use of mechanical Forex trading systems are less vulnerable to emotions as compared to the discretionary traders.

Cons

• Since most of traders back-test the trading system in an incorrect way, so in order to generate correct results the traders need to have tick data.
• The Forex market is an ever changing market and all the forex markets are comprised of random components. Moreover, the market conditions always look similar but in actual they are not.
• It is not always true that a forex trading system that is generating effective results for the past few years will do the same for the coming years.

Discretionary Forex trading system

Pros
• These systems are easily adaptable to the changing market conditions.
• In this trading system the trading decisions are taken in accordance with the past experience that will make the trader learn which signal has high probability.

Cons

• Discretionary forex trading systems can’t be automated or backtested as there is always a chance of a thoughtful decision being made.
• In addition to this, it always takes a significant amount of time to develop a sense of experience that is required for a successful trading system and to track the trades in a discretionary manner.

Well, these are quite a few pros and cons of the Forex trading systems.