These are the four basic types of trading system in use by most FX traders:

• Breakout trading system: Breakout systems monitor the price of currency pairs and generate a trade signal in the direction of the trend if the price breaks through a certain level.
• Reversal trading system: Reversal systems look for a trend that is near completion and then generates a trade signal in the direction of the reversal.
• Indicator trading system: An indicator system is designed up to monitor the trader’s preferred technical indicators and then generates a trade signal when one of those indicators is met.
• Trend-based trading system: A trend-based system determines when a trend exists as well as the direction of the trend. It then executes a trade signal in the direction of the trend. This includes volatility based systems.

In this tutorial, we will focus on breakout and trend based trading systems.

Trading system objectives

The purpose behind having and using a trading system is to receive consistent answers to these critical questions:

• Trend identification: Selecting a currency pair that is trending and suitable for trading
• Position sizing: The quantity to trade
• Entry signals: When to execute a trade
• Stop loss signals: When to exit a losing trade
• Exit signals: When to exit a winning trade

A trading system doesn’t guarantee that you will never have a losing trade (although you should be able to make money over time if you have a positive expectancy). It simply guarantees that all of your trades will be consistent and that your trading decisions will not be influenced by anything other than the rules of the system.

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