There are basically two types of Forex trading systems, mechanical and discretionary systems. The trading signals that come out of mechanical systems are mainly based off technical analysis applied in a systematic way. On the other hand, discretionary systems use experience, intuition or judgment on entries and exits. But which one produces better results? Or more importantly, which one fits better your trading style? These are the answers we will try to answer on this article.
We will first analyze the pros and cons about each system approach.
Mechanical systems
Advantages
This kind of system can be automated and backtested efficiently.
It has very rigid rules. Either, there is a trade or there isnt.
Mechanical traders are less susceptible to emotions than discretionary traders.
Disadvantages
Most traders backtest Forex trading systems incorrectly. In order to produce accurate results you need tick data.
The Forex market is always changing. The Forex market (and all markets) has a random component. The market conditions may look similar, but they are never the same.
A system that worked successfully the past year...
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