Designing your forex trading system.
While it doesn’t take long to come up with a system, it does take some time to extensively test it.
So be patient; in the long run, a good forex trading system can potentially make you a lot of money.
Step 1: Time Frame
The first thing you need to decide when creating your system is what kind of forex trader you are.
Are you a day trader or a swing trader?
Do you like looking at charts every day, every week, every month, or even every year? How long do you want to hold on to your positions?
This will help determine which time frame you will use to trade. Even though you will still look at multiple time frames, this will be the main time frame you will use when looking for a trade signal.
Step 2: Find indicators that help identify a new trend.
Since one of our goals is to identify trends as early as possible, we should use indicators that can accomplish this.
Moving averages are one of the most popular indicators that traders use to help them identify a trend.
Specifically, they will use two moving averages (one slow and one fast) and wait until the fast one crosses over or under the slow one.
This is the basis for what’s known as a “moving average crossover” system.
Step 3: Find indicators that help CONFIRM the trend.
Our second goal for our system is to have the ability to avoid whipsaws, meaning that we don’t want to be caught in a “false” trend.
The way we do this is by making sure that when we see a signal for a new trend, we can confirm it by using other indicators.
There are many good technical indicators for confirming trends like MACD, Stochastic, and RSI.
Step 4: Define Your Risk
When developing your forex trading system, you must define how much you are willing to lose on each trade.
Not many people like to talk about losing, but in actuality, a good trader thinks about what he or she could potentially lose BEFORE thinking about how much he or she can win.
The amount you are willing to lose will be different than everyone else.
You have to decide how much room is enough to give your trade some breathing space, but at the same time, not risk too much on one trade.
Step 5: Define Entries & Exits
Once you define how much you are willing to lose on a trade, your next step is to find out where you will enter and exit a trade to get the most profit.
Some people like to enter as soon as all of their indicators match up and give a good signal, even if the candle hasn’t closed. Others like to wait until the close of the candle.
Others like to wait until the close of the candle.
For exits, you have a few different options.
One way is to trail your stop, meaning that if the price moves in your favor by an ‘X’ amount, you move your stop by an ‘X’ amount.
Another way to exit is to have a set target and exit when the price hits that target. How you calculate your target is up to you. For example, some traders choose support and resistance levels as their targets.
Step 6: Write down your system rules and FOLLOW IT!
Write Down Trading System RulesThis is the most important step in creating your trading system. You MUST write your trading system rules down and ALWAYS follow them.
Discipline is one of the most important characteristics a trader must have, so you must always remember to stick to your system!
No system will ever work for you if you don’t stick to the rules, so remember to be disciplined.
Trading System in 3 Steps
This system is a moving average crossover system, which uses moving averages to determine whether to go long or short.
Additional technical indicators are also used for confirmation before entering a trade.
You’ll learn to use these various technical indicators to establish specific “crystal clear” entry and exit levels.
The trading system can be built in 3 simple steps:
- Define your time frame
- Determine your entry trigger(s)
- Determine your exit trigger(s)
Trade on the daily chart (swing trading)
5 SMA applied to the close
10 SMA applied to the close
Enter LONG if:
The 5 SMA crosses above the 10 SMA and both Stochastic lines are heading up (do not enter if the Stochastic lines are already in the overbought territory)
RSI is greater than 50
Enter SHORT if:
The 5 SMA crosses below the 10 SMA and both Stochastic lines are heading down AND (do not enter if the Stochastic lines are already in oversold territory)
RSI is less than 50
Exit when the 5 SMA crosses the 10 SMA in the opposite direction of your trade OR if RSI crosses back to 50
Exit when a trade hits stop loss of 100 pips
If the daily chart is too slow for you, you can try experimenting with different time frames.
Keep in mind though that the faster the time frame, the higher the likelihood for “false positive” trades. These are trades that meet the entry rules but where you end up getting stopped out.
Remember: A trading system is only effective if it is followed!
You need to have the discipline to stick to the rules!