A trading system is a set of rules, usually based on technical indicators, that defines when a trader enters and exits trades. In addition to increasing profitability and limiting risk, a trading system removes emotion and subjectivity from trading decisions.
All traders should use a trading system. However, no one system works in all types of market conditions. As a result, the Forex trader needs two or three systems at their disposal and must know when to switch among them.
The main types of trading systems are trend-following, counter-trend or range, breakout or counter-breakout, and pattern recognition.
Trend following systems are the most common type of system that traders use. They can be very profitable because within a strong trend, moves are often large ones. Trend following systems buy high and sell higher as prices move upwards. One example of a trend following system is a moving average (MA) crossover approach. A trader would buy when a faster MA crosses above a slower MA. In this example on the three-hour Euro chart, you can see three buy points as the 20 EMA (in purple) crosses up above the 50 EMA (in red). You also have one sell point where the 20 EMA crossed below the 50 EMA. All these trades would have been profitable had you trailed your stop.
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