This lesson’s main goal is to walk you through the process of creating your own FX trading system.
While it does not take long to develop a system, it does require time to thoroughly test it.
So be patient; a smart forex trading method might potentially bring you a lot of money in the long run.
Step 1: Time Frame
When developing your method, the first thing you must decide is what type of forex trader you are.
Are you a swing trader or a day trader?
Do you enjoy looking at charts on a daily, weekly, monthly, or annual basis? How long do you intend to keep your positions?
This will assist you decide which time range to trade in. Even though you will still look at different time frames when looking for a trade signal, this will be the primary time period you will use.
Step 2: Find Indicators that help identify a NEW TREND
We should employ indicators that can detect trends as early as feasible, as this is one of our goals.
Moving averages are one of the most prominent indicators used by traders to identify trends.
They will, in particular, use two moving averages (one slow and one rapid) and wait for the fast one to cross over or under the slow one.
This is the foundation of a “moving average crossover” system.
Moving average crossovers are the quickest approach to spot new trends in their most basic form. It is also the simplest technique to identify a new trend.
Of course, there are many more ways for forex traders to identify trends, but moving averages are one of the simplest.
Step 3: Find Indicators that HELP you CONFIRM the Trend
Our second goal for our system is to prevent whipsaws, which means we don’t want to be trapped in a “false” trend.
This is accomplished by ensuring that when we see a signal for a new trend, we can validate it using additional indicators.
Many technical indicators, such as MACD, Stochastic, and RSI, are useful for confirming trends.
As you become more acquainted with numerous indications, you will discover which ones you favor over others and may add into your system.
Step 4: Define Your Risk
It is critical to determine how much you are willing to lose on each trade while designing your forex trading method.
Many individuals dislike talking about losing, but a competent trader considers what he or she could potentially lose BEFORE considering how much he or she can win.
Your willingness to lose money will differ from that of others.
You must decide how much room is needed to allow your transaction some breathing room while not putting too much money on one trade.
In a subsequent session, you’ll learn more about money management. Money management is important in determining how much you should risk in a single deal.
Step 5: Define Entries and Exits
Once you’ve determined how much you’re willing to lose on a transaction, the following stage is to determine where you’ll enter and leave a trade to maximize your profit.
Some traders like to join as soon as all of their indicators agree and provide a good signal, even if the candle has not yet closed. Others like to wait until the candle has completely burned out.
Others like to wait until the candle has completely burned out.
Pip Surfer, one of our forex traders here at BabyPips.com, believes that it is advisable to wait until a candle closes before entering.
He has been in several instances when he is in the middle of a candle and all of the indications are in sync, only to find that by the conclusion of the candle, the trade has completely reversed on him! It basically comes down to trading technique. Some traders are more aggressive than others, and you will eventually discover whatever type of trader you are.
In the chart below, for example, this trader entered when the candle closed below the support line.
There are several choices for exits.
One method is to trail your stop, which means that if the price increases in your favor by ‘X’ amount, you change your stop accordingly.
Another option is to set a price objective and exit when the price reaches that level. It is entirely up to you how you compute your target. Some traders, for example, choose support and resistance levels as their targets.
The exit in the chart below is set at a certain price towards the bottom of the declining channel.
Others just choose to take the same number of pips (fixed risk) on each trade.
Whatever method you choose to compute your target, be sure you stick to it. Whatever happens, never leave early.
Maintain your trading strategy!
After all, YOU created it! Another way to exit is to create a series of conditions that, when met, will signal you to do so.
You may, for example, set a rule that if your indicators reverse to a specific level, you must leave the trade.
Step 6: Write down your SYSTEM Rules and Follow it
The key phase in developing your trading method is this one. You MUST record the rules of your trading system and ALWAYS adhere to them.
One of the most crucial traits a trader needs is discipline, therefore constantly keep in mind to follow your plan!
If you don’t follow the rules, no system will ever work for you, therefore be disciplined.
Oh, and did we forget to mention that you should ALWAYS follow your rules?
How to test your Forex Trading System
Finding a charting software program that allows you to go back in time and advance the chart one candle at a time is the quickest approach to test your strategy.
You can follow your trading system’s principles and place trades as necessary by moving your chart forward one candle at a time.
Make a note of your trade performance and BE GENUINE with yourself!
Keep track of your victories, defeats, average win, and average loss. You can move on to the next phase of testing—trading live on a demo account—if you are satisfied with your findings.
Trade your new system live on a demo account for at least two months.
You will get a sense of how to trade your system when the market is moving after doing this. We assure you that trading in real-time is considerably different from backtesting.
You will be able to tell if your strategy can actually hold its own in the market after two months of live trading on a demo account.
You can choose to trade your strategy live on a REAL account if you are still seeing positive outcomes.
You should now have complete confidence in your forex trading strategy and be able to place transactions without any concern.