Once a trader has made the choice to open an online forex trading account, the next task is to establish a trading system. A forex trading system is simply as set of parameters that guide the trader to the best time to open and close trading positions. Establishing a trading system, and sticking to it, is essential if the prospective trader expects to succeed trading the forex markets over the long term. Trading systems minimize the influence that emotions can have over trading decisions. Excitement can lead a trader to make a rash choice, just the same as fear of loss can lead a trader to close a position that had a good chance of becoming profitable.
Most Forex trading systems depend on technical analysis, which focuses on currency movements as illustrated on charts. One of the most popular, and easiest to master is to trade on Breakout Points. This trading system does not operate on the traditional “Buy low, sell high” method, but instead seeks to “buy high, sell higher”. Breakout points are identified by searching a chart, and finding the values that the currency has neither exceeded nor been less than since the last major value change, and then waiting for the moment when the currency ”breaks out” from those limits, as this usually indicates a major upwards or downwards movement.
The reason this works is, that the majority of other traders keep a close eye on breakout points, and once the threshold is crossed, thousands of individual traders will close short positions if the currency has broken through the point of resistance (or will close their long positions if the currency has dropped below the lower threshhold, known as the “support point”), thus removing most of the downward (or upward) market pressure on the currency’s value. By following this trading system, traders ensure that they will be on board only during significant movements. However, since movements of such magnitude do not occur every day, the trader must follow more currency pairs than would otherwise be necessary in order to catch them on a regular basis.
Other trading systems include Fibonacci Indicators, Elliot-wave theory, and Pivot points. What they all have in common is that the math is not too complicated, and can all be experimented with in free practice accounts.