The main objective of this article is to guide you through the process of developing your own forex trading system.
Although devising a system may not take long, it can take a long time to prove its effectiveness. So, you have to be patient, because in the long run a good trading system can make you a lot of money.
Step 1: Time frame
The first thing you need to decide when creating your trading system is to know what kind of trader you want to be. Do you want to be a 1 day or 1 hour, trader? Would you like to look at the charts every day, every week, every month, or even every year?
How long would you like to keep your positions open?
Answering these questions will help you determine what time frame to use in your operations. Although you can also analyze charts with different time periods, this will be your main time frame, the one you will use when looking for signals to open or close positions.
Step 2: Choose indicators that help you identify a new trend
Since one of our goals is to identify trends as soon as possible, we must use technical analysis indicators that can achieve this. For example, moving averages are one of the most popular indicators that traders use to identify trends. Two moving averages are usually used (one slow and the other fast) and it is expected that the fast one crosses the slow one above or below. This is the basis for what is known as a moving average crossover system.
Of course, there are many other ways to find trends, but moving average crossovers are one of the easiest to achieve.
Step 3: Find indicators that confirm the trend
The second objective for our Forex trading system is that it has the ability to avoid false signals and thus avoid falling into false trends. The way to do this is by making sure that when we see a sign of a new trend, we can confirm it using other indicators.
There are many indicators that confirm trends, such as: MACD, Stochastic and RSI.
As you become more familiar with the indicators, you will find some that you will prefer over others and that you can incorporate into your system.
Step 4: Define the level of risk
When developing the system it is very important that you define how much you are willing to lose in each operation. Very few like to talk about losing, but in reality, a good trader thinks first about what he can eventually lose before thinking about how much he can win.
The amount of money that one is willing to lose is very different from one trader to another. You have to decide how much space is enough to allow your operations to breathe, but at the same time, not risk a lot in a single operation. In subsequent lessons, we will explain more details about money management. Money management plays a large role in terms of the risk you must give to each operation.
Step 5: Define inputs and outputs for your forex trading system
Once you have defined how much you are willing to lose on a trade, the next step is to discover where to place the close of a trade to get the maximum possible profit.
Some people like to enter a trend as fast as they can when its indicators give a good signal, even when the candle has not closed. Others like to wait until the candle closes.
In my experience, I think it is best to wait for the candle to close before making an entry. I have been in many situations where I am in the middle of the candle and all my indicators fit, only to find that at the close of the candle, the trade turned against me.
But you can have a different opinion when you have some experience. It really is just a style of trading. Certain people are more aggressive than others and you should gradually realize what type of trader you are.
For market closings or exits, there are different options. One way to close is to place a stop loss. If the price moves in your favor by “X” amount, you move the stop loss by that “X” amount.
Another way is to determine a level, and exit when the price reaches that level. How to calculate that level is up to you. Some people choose support and resistance levels for this. Others just choose the same amount of pips on each trade. Anyway, calculating the target level is up to you, just make sure it’s optimal for you and stick with it. No matter what happens, never go out before.
Another way to go out is to have a signal that allows you to go out. For example, You can create a rule when your indicators mark a certain level, you exit the trade.
Step 6: Write the system rules and FULFILL them!
This is the most important step in creating your Forex trading system. You must write the rules of your system and always follow them. Discipline is the most important characteristic that a Forex trader must-have, so always stay true to your system! Only then will you be able to detect possible errors and improvements. Step by step, test, retest, draw conclusions and make small changes without going crazy. It won’t workiIf you are continually changing systems. Give it a certain margin, it is impossible for you to know what works and what does not. No system will work for you if you don’t follow their rules, so remember to be disciplined!