You should be aware that forex trading is a game of odds and probability. To get the expected result, you must keep your method consistent. Trading randomly will only cancel out your odds of success. To succeed in trading, you need to have a trading system. While you can buy a trading system, it is preferable to develop one by yourself; you can backtest and forward-test it as you deem fit. You will be confident with it because you know its strengths and weaknesses.
What is a Forex Trading System?
A Forex trading system is a combination of your trading style, trading strategy, and trading plan. It is your unique method of analyzing the market, identifying setups, trading the setups, and managing your trades.
Types of trading system
A trading system can be a manual system — you analyze, place trades and manage them yourself — or an automated system where a trading robot does all the work.
A trading system may be based on:
- fundamental analysis alone
- technical analysis alone
- a combination of both.
Who can build a forex trading system?
With a good knowledge of forex trading, you can develop a manual trading system. However, to automate your system, you must be good at coding. If you aren’t a coding geek, you can hire one to do it for you using your rules and criteria.
Why you need a trading system?
A trading system helps you to:
- have a rule-based trading
- have criteria for entering and exiting trades
- maintain discipline.
What do you need to build a manual trading system?
To build a good manual trading system, you will need:
- good technical analysis skills
- good understanding of price action
- good knowledge of the indicators and tools you intend to use
- a theory of what you believe can work in the market.
How you can build a manual technical trading system
- Determine your preferred style and timeframe: You should know the style that suits you. Is it scalping, day-trading, swing trading, or position trading? When you have done that, you choose the suitable timeframe(s) for your style.
- Determine your preferred strategy: You can choose to be a trend follower, a countertrend trader (a contrarian), or a ranging market specialist. Pick the one you prefer and focus on it.
- Choose the tools you need to develop the strategy: Whichever strategy you wish to develop, there are tools for it. For trend following, check out trendlines, moving averages, and ADX. If you love range markets, marry the oscillators — stochastics, OsMA, RSI, etc. As a contrarian, look out for the pivot, Fibonacci, support and resistance levels.
- Define the criteria for a trade setup with those tools: You can now spell out what constitutes a trade setup. This can be moving average crossovers, oscillators’ divergences or price hitting a market support/resistance level as the case may be.
- Define the criteria for a trade trigger: You need something that triggers you to enter a trade after the setup occurs. This could be a breakout or indicator crossovers in a lower timeframe. Whatever it is, you have to spell it out.
- Choose the type of order entry: It can be pending or market orders. Spell it out.
- Choose your risk parameters: Your risk parameters are very important. Spell out your:
- account risk — 1% of account size per trade
- position size
- trade risk
With the dollar amount of your account risk, you can calculate your position size for any stop loss value.
- Decide your appropriate profit taking method: Are you going to have a specified profit target in each trade or just use a trailing stop or combine both strategies? You decide and spell it out. Also, spell out the method of trailing stop and the trailing activation point.
- Develop criteria for discretional exits (optional): You may also have criteria for exiting the trade even if the price hasn’t reached your stop loss, trailing stop or profit target. This could be time-based stops, sudden important news, change of price dynamics, opposite setup, or guts feeling.
Test your system
- Backtesting: After building your system, you will need to backtest it on the chart. You can get some scripts that can help you replay the price bars so that you trade them as if they are real price actions. Backtesting will help you confirm the profitability of your system as well as fine-tune the parameters/criteria.
- Forward-testing: After confirming your system during backtesting, you have to forward-test it in a demo account to be sure you can implement it in a real market situation. You may also do this in a live cents-account which is preferable as you test your psychology too.
In conclusion, building your own forex trading system will make you trade it with more confidence. You know the market conditions were it works best and those ones were it doesn’t fare so well. Besides, you will understand the market better building your own.
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