For those who are not comfortable with purely mechanical systems or those whose emotions get carried away using a 100% discretionary approach, a hybrid forex trading style can work best for you.
If applied correctly, this type of trading can combine the best of both worlds and be a better way of trading for you.
What is the difference between a mechanical and discretionary trading style anyway?
a Purely mechanical system It requires the trader to trust a signal system based on price indicators to give valid entry/exit points for long-term profits.
Since all you have to do is wait for a valid signal and take the trade, using a mechanical system can eliminate the psychological aspect (fear and greed) of your trading decision.
But while emotionless trading can be great, there will be times when a mechanical system will give trading signals that don’t align with the current fundamental bias or market environment.
On the other hand, prof A purely discretionary business approach It involves making trades based on where you analyze fundamentals, price action or risk sentiment.
While this type of trading takes into account the current market environment, it can produce inconsistent results when applied by a trader who is easily influenced by emotions and/or personal biases.
How does a hybrid approach solve all of that?
Hybrid trading combines the objective trading rules of a mechanical system with the trader’s discretionary decisions based on dominant market themes, current risk sentiment, price action, and recent economic events.
The advantage of using a hybrid system is that the system is developed based on your understanding of the market and your trading personality.
Ideally, the system will incorporate indicators and parameters that you are comfortable with and understand intuitively.
With a hybrid system, you can choose to make the trades that make the most sense. Remember, one of the disadvantages of taking a purely mechanical system is that it cannot distinguish between changing market environments.
Let’s say the market has been moving recently and you get a signal to sell. However, your system is a trend-following system and you feel that if you take the cue, you will only get sliced.
By integrating a hybrid system, you can use your ability to adapt to current market conditions to override the signal, thereby strengthening your system and avoiding potential losses.
Be careful, as it can be very difficult. If one simply had to go over all trading signals without any basis (such as previous price action), then what is the point of having a system at all?
Always keep in mind that the personal part of a hybrid system is meant to complement the system’s trading rules in order to maximize profits – not to ignore them entirely!
Well, this seems possible. So where do I start?
As tricky as a hybrid system can be, the setup required is pretty simple.
You can start by keeping a record of how price reacts to news reports, different market topics, and market structures.
Documenting price action can be tedious and labor intensive at first, but with a lot of deliberate practice, it will help you develop a knack for spotting similar setups in the future. After all, the phrase “history repeats itself” didn’t become popular without reason.
Of course, specifying similar settings is just that half fight. Since you combine mechanical and discretionary trading, you also need to practice the personal part of the decision-making process.
A good way to prepare is to ask questions like, “Is the market environment the same as the previous setup you recorded? What do I do if the price doesn’t react the same way?”
By checking your estimate with past price action, you can increase the likelihood of making good trading decisions with your mixed trading approach.