Custom Search
|
|
A Short Study Of Mechanical & Discretionary Forex Trading
Is one trading approach superior to the other? How do you decide which one to choose? Let's take a look at the good and bad of each trading approach and consider what selection criteria should be applied in each case. ** Mechanical Trading Approach ** 1. A mechanical Forex trading approach has many advantages. Here, a trader follows very strict rules for trading, which keeps him/her in control to avoid emotional trading. There is no guess work, as it is unambiguous whether a trade should be entered or exited. 2. Mechanical trading derives trade signals from a system based on historical Forex trade data. Since Forex trading strategies crafted this way can be precisely back-tested with performance statistics to show for it, this is seen as an advantage. Moreover, a mechanical trading approach lends itself well to automated Forex trading -- the trader can do Forex trading unattended via automatic system-generated trades sent straight to the broker. 3. The main disadvantage of a mechanical trading approach comes from its inability to react to and follow new market conditions. As historical data is always biased to past market conditions, even if the system statistics show favorable performance there is no guarantee the system will continue to generate Forex profits in the present or future. Worse, the system can be tweaked to optimize performance statistics, which may give an impression it works very well. ** Discretionary Trading Approach ** 1. Discretionary trading utilizes mainly a trader's experience in the Forex markets, which can be good as the trader is able to select higher probability trade opportunities and ignore the lousy ones. Since a human makes the trade decisions, changing and new market conditions can be factored in quickly and adjustments made to the trading approach. 2. However, the human factor in the discretionary Forex trading approach can also be viewed as a drawback. It takes many years to gain the necessary Forex trading skills and experience, and very likely also a few accounts blown. Few traders can trade without emotion when money is on the line. The fact that the system is not rigid also means the Forex trader can be affected by hindsight to change trading rules without concrete reasons. Lastly, trade automation is not feasible since a human is required to make a decision on every trade setup and when to exit trades. Before you embark on either trading approaches, evaluate first you perform as a Forex trader. Do you doubt your trade setups? Are you the sort that keeps moving stop losses as trades play out? Does being in a trade often evoke feelings of fear, greed and anger? Perhaps a mechanical trading approach would fit you as it can alleviate most of these problems. What if you have a special ability to score home runs under certain market conditions? Or if you can "tell" that a trade setup might not work in a particular situation? And you are very disciplined and also emotionless when trading? Well, discretionary Forex trading may suit you better since you are in control and larger-than-usual profits (compared to mechanical trading) can sometimes be had. Finally, there is also the idea of mixing both trading approaches to make a hybrid one. Consider taking the advantage of Forex trade automation from mechanical trading, so that you get trade evaluation and order entry covered. Slap on the option of human intervention to allow non-performing trades to be exited early, new trades to be selectively added on, and finer adjustments of target prices. This is like a best-of-both-worlds approach and is perhaps the ultimate choice for some Forex traders. Whichever trading approach you choose, there are a few inescapable rules to follow. Always know your risk before each trade, not take a setup first and evaluate risk thereafter. Always use correct position sizing for proper risk and money management, so that you protect your trading capital. And do give time for the system to perform. Article Directory: http://www.articledashboard.com Engie F is an independent freelance article writer and reviewer specializing in the investing domain. For more information on automatic Forex trading, visit www.theAutomaticForexTrading.com. Learn how to trade Forex the hassle-free way. |
|