What is a 'Currency Day Trading System'

A currency day trading system is a framework that day traders in the foreign exchange market use to determine whether to buy or sell a currency pair. Typically, the system consists of several currency day trading signalsthat are based on technical analysis, fundamental analysis or some combination of the two. Financial institutions trade in yards, or US$1 billion increments, while retail and professional day traders trade in standard lots. These lots allow them to control up to US$100,000 with a single trade while risking just US$500 with leverage. Each trade involves buying one currency with another currency, i.e., the currency pair.

BREAKING DOWN 'Currency Day Trading System'

A currency day trading system provides insight for traders use when looking to determine whether to buy or sell currencies. Broadly, there are two main systems used. Manual currency trading systems involve traders tracking signals on their own; signals may include a particular chart pattern, a breakout of an important resistance level or a news event to materialize. Traders then interpret those signals prior to engaging buy or sell activity. Conversely, automated currency trading systems allow traders to program software to look for particular signals and how to react to them. These systems can either alert a trader to make a trade or place the trade automatically. Some of the more popular trading system methodologies include the following:

  • Scalping involves buying or selling immediately after the trade achieves profitability. Trading is frequent occurs en masse in this system, typically with large volumes. Income per trade is rather small, though.
  • Fading involves shorting stocks, and index or a currency pair immediately following upward moves. The target price is set when buyers reengage in the market. 
  • Daily Pivots seek profit through daily price volatility. Buying and selling occurs during low periods and trades are closed at high periods.
  • Momentum systems follow market developments or by identifying strong trends accompanied by high volumes. The target in this method is when volume starts to decline and bearish candles appear. 

Currency Day Trading Systems and Backtesting

Currency day trading systems, in theory, could be active 24 hours a day, six days a week. The near constant activity in the currency markets makes it a popular destination for many day traders. As a result, it is important to know how the system will hold up in different market scenarios and to identify soft spots that the trader may want account for. 

Traders often backtest their systems with historical market data to determine whether the underlying algorithm produces the expected results in certain scenarios. Unusual market activity is particularly notable to traders, so many subject their trading systems to extreme scenarios to see how they would perform under market stress.

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