The 3 Different Forex Trading Systems You Must Know By Alex Hawk

So you've delved into the wonderful world of Forex and you're as confused and paralyzed as a deer at a headlight. No worries, let this article enlighten you on some of the most fundamental types of trading systems. Trend Following The most common type of trading system. If you carefully think about it, it's pretty clear why this is the most common type of trading: as the majority of market participants align themselves to one side, the market, a product of the participants' decisions, will also go one-way. If the majority of the EUR is going up, it means that the majority of traders are going up. Trend following, to a certain extent, means going with the crowd. If the market is rising most of the time, you'll have an easier time riding the market's waves. What's so good about this trading method? First, the accuracy, the probability of you making a winning trade, is higher. You won't have to make too many trades, but you'll make plenty of profit. Of course, you'll still have to know the exact rules of when and how to enter and exit. But here some tips: Trend Following Entry/Exit Tips: * 1. Try entering on corrections and retracements. How do you know when the market might trend following again? Enter on support and look at price action. If the trend if up, and you see buying, that's a good place to enter. * 2. Place a trailing stop loss beneath the most recent lows to really milk out the profits. Trend following is a very common, basic trading method. To qualify the common saying, "The trend is your friend, until it ends." Let's take a look at another trading style. Fading The second type of trading is called fading. Fading means going the opposite direction of the market. Sometimes you can sell into strength, or buy into weakness. This is basically bottom and top picking. So what's the good thing about fading? The good thing about fading is that when you are right in your analysis, the reward greatly exceeds the potential loss. If your reward to risk ratio is 10:1, it means you can be wrong 9 times and still be profitable. Well of course, you wouldn't want to catch a falling knife, you wouldn't want to gamble and guess; your trading system still needs to have a positive edge and you still need to have done your homework. Maybe the market has been going up for the past few months but now you see a huge doji. You might want to short it now, or you might want to wait for a close below the recent low. The point is, fading is a very different trading style from trend following. Now, let's explore the final trading style. Breakout Trading This type of trading is entering when price makes a new high or low. If the market breaches the 52 week high, you might want to enter then. Or if the market breaches the past 20 week's low, you might want t short it then. The keyword is "breach". Of course, you should make sure that your system has a positive edge and is profitable. Breakout trading is just another way of entering the market. Of course, the way you exit a trade is totally up to you; you might want to trail by the most recent lows. Or perhaps you'll have a predetermined exit. So what's the difference between trend following and breakout trading? OK, they might seem pretty similar, and they kind of are. The key difference is the entry. With breakout trading, you enter with the breach of a prior high or low. With trend following, a breach doesn't have to occur, but rather you can enter on a dip. So Now What? That last paragraph brings up another important point. You can trade however you want. These trading styles are just to expose you to different ideas. Of course, if you want to, you can follow the trend and enter on a breach on only the trend's side. You can use whatever combination that suites you. But if you're somewhat stuck on what system you might find useful, there's good news! I've done most of the research for you. My Forex and Online Income website has compiled most of today's different forex trading strategies. Feel free to browse through both the discretionary and mechanical trading systems and be sure to check out the trend following, fading, and breakout trading systems. Article Source: http://EzineArticles.com/?expert=Alex_Hawk