Forex Trading System

January 10, 2008 – 5:45 am

Forex is the international exchange market where one currency is byuing and another currency is selling simultaneously. Currencies are traded in pairs, for example Euro/US Dollar (EUR/USD) or US Dollar/Japanese Yen (USD/JPY). This unique market is almost free from all the external controls.

The FX market is considered an “interbank” market, due to the fact that transactions are conducted between two counterparts over the telephone or via an electronic network. Trading is not centralized on an exchange, as with the stock and futures markets.

Marginal trading, which is speculating the currency prices by getting a credit line, used for trading with borrowed capital. It is important because of the fact that in Forex investments can be made without a real money supply. Thus, one can conduct relatively large transactions, very quickly and cheaply, with a small amount of initial capital.

Technical and Fundamental Analysis are the two main strategies in Forex. Technical analysis is basically studying the past action of a particular currency and investing in that currency hoping that history would repeat itself.

A Fundamental Analysis analyzes the current situations in the country, including its economy, political situation, and other.

Start Forex trading

Foreign exchange used to be limited to large players such as national banks and multi-national corporations. In the 1980’s the rules were revised to allow smaller investors to participate using margin accounts. Margin accounts are the reason why Forex trading has become so popular. With a 100:1 margin account, you can control $100,000 with a $1,000 investment.

Forex traders usually require a reputable broker to make their transactions. A reputable broker will be registered as a Futures Commission Merchant (FCM) with the Commodity Futures Trading Commission (CFTC).

There are two common mistakes that many beginner traders make: trading without a strategy and letting emotions rule their decisions. For example, you buy and watch the market move against you. You panic and sell, only to see the market recover. This undisciplined trading is guaranteed to lose you money. Forex traders need to have a rational trading strategy and not allow emotions to rule their trading decisions.

To make rational trading decisions the Forex trader must be well-educated in market movements, in the various types of orders to minimize his risk and maximize his profit.

The first step in becoming a successful Forex trader is to understand the market and the forces behind it. This knowledge will allow you to identify successful trading strategies and use them as models for your own.

There are 5 major groups of participants in Forex: Governments, Banks, Corporations, Investment Funds, and traders. Each group (except traders) has an external control. Individual traders are accountable only to themselves.

The form for opening Forex account includes a margin agreement that states that the broker can interfere with any trade it deems to be too risky. Once your account has been established, you can and begin trading.

Brokers give different types of accounts. Mini accounts allow you to get involved in Forex trading for as little as $200, while standard accounts may have a minimum deposit of $1000 to $2000 depending on the broker. The amount of leverage varies with accounts. High leverage gives you more borrowed money to trade for a given investment.

Demo accounts allow you to see how the system works while learning how to use the various software tools. Every new Forex investor is strongly advised to use these demo accounts.

Each broker has their own set of software tools to aid in making transactions, but there are a few tools that are common to all Forex brokers. Real time quotes, news feeds, technical analyses and charts, and profit and loss analyses are some of the features you should expect to see on most online brokers’ web sites.

About Fibonacci

Fibonacci studies are the basis of many Forex trading systems. They used by a great number of professional Forex traders.

Fibonacci studies formed by a series of numbers where each number is the sum of the two preceding numbers; 1, 1, 2, 3, 5, 8, 13. In the case of currency trading the Fibonacci ratios is more important. It is derived from this sequence of numbers, i.e. 0.236, 0.50, 0.382, 0.618, etc.

Fibonacci price points, or levels, for any Forex currency pair can be calculated in advance so that the trader will know when to enter or exit the market if the prediction given by the Fibonacci day trading system he uses fulfills its predictions.

Building a Forex Trading System

All traders have to understand that building a Forex trading system is a clear step by step process without the confusion created by most charts.

1) Build

In the first step the trader has to make two important decisions, what currency pair to trade and will the system be based on trending or not. Each currency pair moves differently. Some systems may be just as effective in both a bear and bull market while others depend heavily on trends.

Trader can have the perfect entry point, but if he don’t know how to exit trades (to book profit) your entry expertise is useless.

2) Valuation of the trading system

Every forex trading system has a bottom line, potential and leveraged value. The best method to measure the value a system is historical testing. This test determines if the system is worth pursuing.

3) Fine Tune

Your first design will more than likely be flawed to some degree. Run a historical test to identify the flaws and then fine tune the system for maximum performance. Reduce losing trades with a tighter entry schedule. Implement a stop limit entry to avoid the stop being hit too often. Use an exit signal if winning trades produce less pips on average than losing trades etc.

4) Duplicate the system

After building one basic system duplicate it into several more. You can break down a number of systems into separate components and mix match them to form new systems each with a different setup.

5) Monitor

When a system is complete the final step is to monitor the system in live test trades in a demo account. It helps to use the system in a real trading account.