Types of trading systems


There are many types of trading systems and they can be classified, in general, based on their discretion, the trend phase they operate and the direction of their operations.

Trading systems are sets of rules that facilitate operations in financial markets. The amount of classifications that can be made of them is very large. Since each classification, in turn, will have several subtypes. However, there are three types of classifications that are the most useful and also the best known.

Discretionary, semi-automatic and automatic trading systems

Depending on the discretion, there are three types of trading systems. We could also say based on objectivity. However, objectivity in the world of the stock market can also be subjective. Thus we distinguish between:

  • Discretionary: They are trading systems that even having defined rules, leave the last decision to the judgment of the trader. For example, a system based on chart figures.
  • Semi-automatic: They are trading systems that have defined and fixed rules, but operations are entered manually. For example, a system based on moving averages operated manually.
  • Automatic: These are those trading systems that, having defined and fixed rules, launch operations through an algorithm. For example, an expert advisor.

Trading systems based on directional and market neutral strategies

Depending on the type of strategy we can distinguish between trading systems based on different types of strategy:

  • Trading systems based on directional strategies: They are trading systems that open long or short positions. They try to profit from movements in one direction or another of the quotes. For example, any system based on technical indicators.
  • Trading systems based on market-neutral strategies: These are trading systems that simultaneously open long and / or short positions in several assets at the same time. They try to generate profitability by exploiting inefficiencies in the financial markets. For example, pair trading systems

Trend, lateral and countertrend trading systems

Depending on the trend phase in which they operate, we can distinguish three types of systems:

  • Trends: They are trend systems or trend followers, those that try to take advantage of upward or downward trends. For example, systems based on Dow theory or moving averages.
  • Attendant: Attendant systems are those that operate price ranges or that do not look at the price charts. For example, selling at resistance and buying at supports within a lateral trading channel. Another example of care systems are those based on investment in value.
  • Counter-trend: Counter-trend systems are those that operate against the general trend. That is, those who try to take advantage of trend corrections to generate profits. For example, a system based on divergences of the MACD indicator.

A trading system can be of three types at the same time. For example, an expert advisor that operates on the basis of moving averages, is an automatic, directional and trend system. Another example, a system based on trading trend continuation chart figures, is a trend and directional discretionary system.

The following is an outline of the hierarchy of the most important types of systems:

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