Currency Day Trading System

DEFINITION of 'Currency Day Trading System'

A currency day trading system is a set of analyses that forexday traders use to determine whether to buy or sell a currency pair at any given time. A day trader’s currency trading system is usually made up of a number of currency day trading signals, which are based on technical analysis charting tools or fundamental, news-based events.

BREAKING DOWN 'Currency Day Trading System'

The currency market trades 24 hours a day, six days a week, which makes it a popular choice for day traders. While financial institutions trade in “yards”, or US$1 billion increments, retail and professional day traders focus on standard “lots” that enable them to control up to US$100,000 with a single trade risking just US$500 with leverage. Each trade involves buying one currency with another currency in what’s known as a “currency pair”.

Currency Trading Systems

Currency trading systems are simply pre-defined rules for buying and selling currencies, which can be based on technical analysis, fundamental analysis, or a combination of the two.

There are two types of currency trading systems:

  • Manual – Manual currency trading systems involve the trader watching a computer screen for signals and interpreting whether to buy or sell a given currency. For example, a trader may be watching for a certain chart pattern to materialize, a breakout from a key resistance level, or for a particular piece of news to come out.
  • Automated – Automated currency trading systems enable traders to “teach” software what signals to look for and how to interpret them. These trading systems can then either alert a trader to make a trade or place the trade automatically. The idea is to take the emotion out of trading to focus on fine-tuning what matters.

Trading systems are often backtested using historical market data to determine whether the underlying algorithm produces the expected results. Traders may also subject trading systems to extreme conditions to see how they would hold up during unusual market events.

The vast majority of trades occurring across all asset classes are now automated trading systems and the forex market is no exception.

How to Develop Trading Systems

Most traders develop trading systems using special software designed to create and backtest trading algorithms.

The most popular trading system software for retail forex traders is MetaTrader, which is an electronic trading platform that’s widely used. The software is licensed to many different forex brokers that provide it to their clients. Using the MQL5/MQL5 scripting language, traders can write their own currency trading systems that can be executed on the platform through the attached forex broker, making it a unique option for small retail traders.

There are many currency trading systems available for purchase over the internet, but there is no such thing as a “holy grail” that produces consistent profits. After all, a perfect system wouldn’t be sold by a developer, it would be used to generate compounding profits.

Most forex traders are best off creating their own currency trading systems by relying on their experience and comfort level in the currency market.

The Bottom Line

A currency trading system is simply a set of analyses that forex day traders use to determine whether to buy or sell a currency pair at any given time. These systems can be both manual and automated with most traders preferring software like MetaTrader to implemented automated systems and execute trades through their broker.