Different Types of Forex Trading Strategies & Systems

The following article discusses four different types of Forex trading strategies and systems.

• Mechanical Rule-Based Forex Systems

Forex trading systems built off indicators are usually mechanical and rule-based. This means the designers of the system have set specific rules for entering and exiting based off some formation or “signal” generally produced by two or more indicators.

The main problem with mechanical Forex trading systems that are built on indicators is that they can be very difficult to interpret and downright confusing. Also, a rigid set of trading rules will not work in all market conditions. The Forex market ebbs and flows and is very dynamic. Therefore, trying to “define” it with a set of rules is quite futile.

• Forex Trading Robots / trading software

Forex trading “robots” are very popular on the internet these days. Many programmers are designing trading systems that can be fully automated using Metatrader 4 or 5. The appeal of these Forex trading robots is that they claim to eliminate the potential for human emotional error by fully automating the trading process. There are a couple problems with this claim however.

First off, the human trader is still technically “in control”; they can very easily over-ride the trading software and trade based on some idea they have or some other strategy. So, the problem of human discipline is still there; you still have to be disciplined to actually follow the system and not deviate from it, many traders have just as much trouble with this as they do with being disciplined to manage risk or not over trade. Also, Forex trading robots vs. the human mind is an interesting concept. A piece of trading software is inflexible and not adaptable to changing marketing conditions; a computer program can only do what it is programmed to do. So, be careful with trading robots and trading software, they are very easy to market and to hype up, but they rarely, if ever, deliver on the bold claims they make.

• Discretionary strategies

There are many discretionary Forex trading strategies that traders use to analyze and trade the market with. These typically consist of “classic” technical analysis techniques like basic chart patterns, candlestick analysis, Forex breakout strategies, trend-following strategies, Forex trend line trading strategy, Forex Fibonacci 50% trading strategy, support and resistance Forex strategies, and more.

These discretionary strategies can work, but they take a lot of practice and, well, discretion. They are more of a trading “tool” that can compliment an actual Forex trading strategy than they are actual trading strategies in and of themselves. Still, they are worth understanding, so be sure you click the links above and read about them.

• Price Action Strategies

Finally, perhaps the best Forex trading strategy is price action trading. Using simple price action trading setups, you can build a comprehensive Forex trading strategy that will allow you to make sense out of the dynamic and ever-changing Forex market, no matter what condition the market is in. This is a key distinction between price action and mechanical trading systems and trading software; price action is flexible and adaptable, while many other strategies and systems are not.

The other big advantage of trading with price action strategies is that it is a very clean way to trade the market. You don’t have a bunch of confusing and messy lagging indicators all over your charts. Instead you can learn to trade effectively off a handful of easily identifiable and high-probability price action setups on nothing but a plain vanilla price chart. Combining these price action strategies with some of the discretionary trading strategies discussed above can be a very potent and efficient way to trade the Forex market. To learn more about price action trading and how to trade the Forex market with simple price action strategies click here: Forex price action trading videos.