Forex Systems and Strategies, A Subtle Difference Worth Knowing

A newcomer to foreign exchange markets could easily be confused as these two terms are often used but rarely defined. Strategies can therefore appear to mean the same as Systems.

So, what exactly is a forex Strategy as opposed to System?

I agree with Van Tharp who states that what most people see as a trading system is really just a trading strategy. That is, a set of rules and parameters covering such things as:

profit targets

stop loss

early exit triggers

stop trailing rules

percentage of account to risk per trade

etc…

In other words, the nuts and bolts of scanning the market for trades, and entering and exiting those trades.

A System encapsulates this strategy – and potentially others – within the context of a Trading Plan. Every trader should have such a plan, and inside that plan the definite rules for each strategy employed by the trader should be laid out.

For example, a Trading Plan might have a high-level structure as follows:

Forex Systems and Strategies the Difference is the Plan

A trading plan is one of the distinguishing features of a trading system as opposed to trading strategy

1) The Trader That I Am:

– Psychological Profile etc.

2) How I Trade

– Timeframe

– Attitude to News Trading

– Trade Strategy 1

– Trade Entry

– Trade Management/Stop Trailing etc.

– Trade Exit

– Trade Strategy 2

– Trade Entry

– Trade Management/Stop Trailing etc.

– Trade Exit

– etc…

3) Trade Management

– Stop Trailing etc.

4) Account Management

5) My Golden Trading Rules

etc…

We will be covering Trading Plans in detail elsewhere. They are mentioned here for the purpose of showing the difference between Forex Trading Systems and Forex Trading Strategies.

Let’s just say the two terms are generally assumed to mean the same thing when traders talk to one another. And generally that will be the situation on this site, except where it may seem more appropriate or likely to cause less confusion by using one or the other.

Having said that, I have tried to split strategies and systems into two sections, where forex strategies are just the bare bones approach to a trading play as defined above, and forex systems refers to a section of more comprehensive approaches.

I apologise if all of this appears to be nitpicking, but remember this is a business and it is important to iron out the terminology and concepts before you start risking real money.

Now let’s get on to the next step in determining your unique approach to selection of a trading methodology.

I suggest for those of you who have yet to define themselves as a trader – scalper/day trader/trend trader etc – the next section you might want to take a look at is Trader Type. Otherwise you may choose to go straight to Forex Trading Strategies or Forex Trading Systems…