» Technical Trading Systems
A trading system (also called a trading strategy) is a plan by which a trade is placed. It defines the different parameters for entering a trade, holding the position, and exiting the trade. These parameters are defined with the goal of achieving the maximum profit and minimizing losses on every trade.
Technical Trading Systems :
Technical trading systems rely on technical indicators and charting techniques. The parameters for the system are determined solely by certain price movements on charts and the data from technical indicators. For example, a technical trading system could employ a parameter that the currency price must be within five percent of the 20-period moving average line. Another example is that a trading system looking for a strong trending currency could require that the ADX level is above 40.
Technical trading systems often combine technical indicators to determine the parameters. For example, a trading system could require that the currency is moving within the Bollinger Bands and that the ADX is above 40. Alternatively, a trading system looking for an explosive price movement could require that the Bollinger Bands are squeezing the currency pair and that the ADX is below ten.
Technical trading systems are used by both range traders and trend traders. There is so much technical data available that the indicators can be used for a wide variety of price movements.
Advantages and Disadvantages :
A fundamental trading system relies on the release of economic reports and the data found in those reports as parameters for entering a trade. This type of system is much more dependent on demand factors than technical trading systems. The parameters are the economic reports and their ability to affect the demand for a currency.
A fundamental trading system can have the parameters such as the release of the nonfarm payrolls with the expectation that the payrolls figure will be high, which would create more demand for the USD. Another parameter could be the release of the FOMC minutes in which the Fed makes a decision on interest rates. Any economic report can affect the demand for a currency and fundamental trading systems predict how and when this will happen.
Fundamental trading systems do not usually combine more than one report at one time, but will use only report and its analystsí expectations to determine if demand will be increased or decreased. Charts are not considered or used by fundamental trading systems.
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