While Creating your own forex trading system is only 1 of 3 things you need tohave in order to trade successfully. While it theoretically may not take long to set up a trading process, the bulk of time will be spent testing your new system.
While there are already crafted systems in place you can swipe, some people are DIYers. I don’t discriminate. So if you fall in the latter category have at it. Here are the 5 things you need to do in order to put together a solid, workable trading system.
Step 1: TimeFrame
This is the very first decision that needs to be made by you. Do you want to be placing trades once an hour, once a day, or once a week. How long are wanting to hold those positions.
Basically, the more trades you take will correlate with what time frames you will end of using. For example, day traders and scalpers will find themselves using shorter time frames to analyze and gauge the markets such as the 1 minute, the 15 minute and the 30 minute charts collectively.
On the other hand, longer term and swing traders will find themselves using frames such as the 30 minute the 1 hour, the daily, the weekly and monthly charts to identify opportunities.
Step 2: Find indicators to help determine when to enter the market
The first thing as traders we need to know is when to enter the market. I recommend using tools to help you decipher when that time is such as moving average combination, RSI, or the MACD as well.
As you probably already know, trade entries are very important. Your trade entry has the ability help make any given trade a much, much more profitable one than it would’ve been. Yet, traders tend to take trade entries for granted and are quite careless when it comes to their entries.
A better trade entry can significantly improve the risk reward potential of a trade as well as get you a better stop loss placement which can decrease your chances of getting stopped out of a big move in the market.
Step 3: Filters, Filters, Filters
Now that you have a way to help identify when you should enter the markets and when to do so, you need something else. A way to tell you to stay out of the market or at least something that will better control your discretion on when to enter the market.
As a trader there will be endless amount of entry signals to choose from. The problem is determining which of those are misleading or “whipsaw” signals. And if you end up entering a trade every time the aforementioned tools suggest you should you’re gonna be pretty pissed when that market almost immediately rallies AGAINST the position you just took. That my friend is a whipsaw or a false signal.
Step 4: When to Exit the Market
Welp, we already covered how what you should use to enter the market. It’s only fair we discuss how to exit that market. Sooner or later you have to take your money off the table or risk giving it back to market.
Some ways to determine how to exit a trade:
-Predetermined Pip Level
example: If I get to 200 pips I will
Pro: Keeps you focused and disciplined so you know where you leave the market
Con: what if price never hits that level, what do you do then? Better yet, what if price blast through your predetermined exit point for even more pips than considered. Do you exit the trade still? Better question: Do you have the discipline to still exit??
Pro: Again, you it keeps you focused. Better yet, you don’t even have to think because your system is moving it for you regardless.
Con: Because you can never know if your stop will be hit on any given trade, you may be knocked out right before a major move in your desired direction. Leaving you on the outside looking in.
Of course, there is no such thing as a 100% correct answer. That’s both the beautiful and scary factors of trading. You have to understand what will work best for you and what you will work best with.
To add to that, you also need to know when to cut a loser and move on/
It should go without saying that you you should be actively managing your risk upon each and every trade.
How to do that Here:
But these are the main 4 things you need to have (at minimum) in order to have a solid trading plan.
Listed below are some books if you want to get deeper into building techniques & algorithms. ForexProfitPros.com receives a small credit from any purchases by way of the Amazon hyperlinks above to support the free content and features of our web page experience!