Trading system. What is it and why should you optimize it?

Investors globally utilize a variety of different strategies when trading in financial markets. While no one strategy is the correct one, as varying strategies can be useful at different points of time or in connection with an individual investor's risk tolerance, maintaining a trading strategy often allows an investor to have predefined goals and reactions to market fluctuations that prevent them from becoming frozen as a result of financial markets not moving in the direction that they believe they will.

In order to develop an appropriate trading system for your risk tolerance, a trader should determine what they are seeking to obtain from the market. If they are simply looking to hedge their risk, then a different strategy may be implemented then one purely out to obtain outsized profits from trading. For example, in Asia, an individual or business may have a significant amount of exposure to a specific currency due to the nature of their business. A firm that sells primarily in China may be exposed primarily to the Chinese Yuan, while a firm whose customer base is in Japan may be primarily exposed to the Japanese Yen. As such, these individuals may seek to hedge their currency risks by purchasing foreign assets or currencies or by shorting their functional currency. This way, if their functional currencies were to depreciate in value, they would be able to realize some appreciation in the hedged investments to offset these currency declines.

Other investment firms in Asia attempt to develop a trading system or platform that is based on investment systems that are commonly used in Western markets, such as a high frequency trading platform. A high frequency trading (HFT) system attempts to capitalize on minor fluctuations in stock prices typically captured by a computer that is significantly faster than those used by other market participants. This HFT system will time increases in the stock market based upon automated trend analysis and purchase shares slightly before other participants do and sell them to the other participants at a small profit. Each share typically only amounts in a small profit in a HFT system, typically less than a penny in amount, but as many transactions are processed, the profits using this system quickly add up to be significant in amount. A HFT system is often commonly used in Asian markets due to lower amounts of regulation in these markets as well as less liquidity which allows this trading model to prosper as a result.