The Technical Trading Systems Library
What is a technical trading system and why use one?
A technical trading system is a set of rules that, using market price data, defines when to enter a trade (entries), when to exit a trade (stop losses, profit targets, etc) and how much to risk on any trade (money management). If you are trading without a good trading system, then your odds of failure skyrocket.
What makes a good technical trading system?
I would define a good trading system as any system that has been proven to have a 'tradable edge' – a tradable edge is simply a large enough positive return expectancy to make a profit after the costs of trading. In Forex trading there are no certainties, only probabilities. When the odds (probability) of making a profit are in your favour you have the edge. I would say that any trade, where the odds are significantly in your favour (providing you're also using sensible money/risk management), should be considered a 'good trade', regardless if the trade is actually a winner or not – if a trader consistently trades like this they will eventually win regardless of the results of any one trade. Without an edge no trading system would ever return a profit in the long run, in the same way that no casino could never make a profit from a roulette wheel if it weren't for the extra zero skewing the odds in their favour and thus giving them their edge. No matter how good a risk management strategy one uses, without an edge skewing the probabilities in your favour you will never make money in the long run.
What causes a technical trading system to have an edge?
Unlike a game of roulette, financial markets aren't random. There are random ticks, and the smaller the
trading time frame the more randomness one will general observe, but the markets aren't random. There are three things (that I know of) that aren't random in the Forex market and can give trading systems an edge –
Firstly, markets often trend. The trend's direction gives trades in the direction of the trend a statistical advantage (or an edge) over trades in the opposite direction of the trend. The stronger the trend and the longer the trade is on for whilst the trend remains in place, the greater the edge and the more likely the trade is to succeed.
Secondly, markets develop statistically significant price levels such as support and resistance levels. Support and resistance levels are levels where the price is not likely to break above or below and to move very violently if it does, trading systems can use these levels to produce an edge.
And thirdly, price momentum. In some markets when the price moves rapidly enough in one direction there is a significant chance that the move will continue in that direction for sometime.
Following the main trend and placing trades to take advantage of statistically significant price levels is the only way I know of to gain a tradable edge and make money in the Forex market. If anyone knows of any other way that of making money that can be properly back-tested using a technical trading system place contact me and let me know.
Building a technical trading system for you,
In order to be successful with any technical trading system you need to have the confidence (and the appropriate risk/money management rules in place) to stick with it through thick and thin. It's much easier to do this if the system 'is your own', that is, if you developed and tested the system yourself and know that it has a tradable edge. Systems that you have developed yourself are also likely to suit your personality with their timeframes and goals, which again, makes them even easier for you to trade. The systems that I offer up here are not 100% complete, they are a set of rules that when followed have been shown to have a statistically significant tradable edge, offered up to the reader for free to tweak, test, and make their own.
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