Systematic Trading in Foreign Exchange
We can define systematic trading as a process or discipline that employs a mechanical set of rules, called a trading model, for determining market entry and exit points based on a pre-established and predefined plan. However, like most other aspects of trading, everyone has their own interpretation. Many traders refer to themselves as “rules based” rather than “systematic” as this allows them to have some discretion over their trading. We are taking a broad church approach in this chapter, which we believe will provide a wider-ranging introduction to the subject as well as allow the reader to adapt what he or she may find appropriate to suit his or her own style of trading.
The aim of this chapter is to provide an introduction to systematic trading and its benefits and limitations. Nevertheless, it is important to first examine the growth in systematic trading that has taken place over the past 10 years or so and the associated impact of electronic trading technology on the foreign exchange (FX) industry in general.
Although the FX markets have developed at an impressive pace since the end of the Bretton Woods agreement in the early 1970s; the technological advances that have occurred over the past 10 years have transformed the industry in a way that was unimaginable a decade earlier. This transformation, when viewed in conjunction with the parallel growth in the ...