Idea
There are basically two types of Forex trading systems, mechanical and discretionary systems. The trading signals that come out of mechanical systems are mainly based off technical analysis applied in a systematic way. On the other hand, discretionary systems use experience, intuition or judgment on entries and exits. But which one produces better results? Or more importantly, which one fits better your trading style? We will first analyze the pros and cons about each system approach.
Mechanical systems
Advantages
This kind of trading system can be automated and
backtested efficiently. It has very rigid rules. Mechanical traders are
less susceptible to emotions than discretionary traders.
Disadvantages
Most traders backtest Forex trading systems
incorrectly. In order to produce accurate results you need tick data.
The Forex market is always changing. The Forex market (and all markets)
has a random component. The market conditions may look similar, but
they are never the same. A trading system that worked successfully the
past year doesn’t necessary mean it will work this year.
