How do you create your own forex trading system?
To understand the process to create your own forex system, you need to understand the definition of forex trading system.
But what is the definition of a forex trading system (strategy)?
Well, a forex trading system or strategy is a set of rules a trader follows to buy or sell in the forex market with the objective to make a profit.
The key word there is “set of rules”.
At its most basic level, there are only 2 set of rules in any trading system:
- how to find entry points for trade entries.
- how and where to exit a trade
Everything else is built up form these two sets of rules, things like calculating risk that are then built into these two main rules above.
But to just give you something that you can use as a guide, I will show you simple 7 step plan to creating your own forex trading system.
Let’s start with the first step…
Step 1: Choose Your Trading Timeframe
Not all traders like trading in the daily timeframe, not all traders like trading in the 5 minute timeframe either.
Important thing here is that you’ve got to find a trading timeframe that matches your personality.
If you are a trader that likes to sit and watch your trading screens all day long then trading the lower timeframes should be good for you. It does not mean you are going to be a profitable trader…that’s a topic for another time maybe.
But if you are someone who likes trading less, trading the larger timeframes would suit you.
Step 2: Choose The Right Trading Tools
Trading systems are based around trading tools. For many, these trading tools are forex indicators.
Forex indicators like:
- rsi
- macd
- stochastics
- moving averages
- parabolic sar
- and otheres
It is important that you understand how each of these indicators works. What I mean by that is you need to understand their strengths and weaknesses.
Also figure out ways where combining one or two other indicators will make your trading system better or not so that you can spot optimal trading setups.
Then there are the price action traders. 100% price action traders totally rely on bar charts or candlestick charts and chart patterns to make trading decisions.
These price action traders see no need for the use of forex indicators because they know price tells all the story that a trader needs to know.
So the study of candlesticks, chart patterns like head and shoulders, symmetrical triangle chart patterns, support and resistance levels etc are very important to these price action traders.
Step 3: Choose A currency Pair and Find Its Active Trading Hours
I have spent a hundreds, maybe thousands of hours watching charts and currency pairs and believe me, I tend to notice that certain currency pairs have certain behavior.
In addition to these certain behaviours, each currency pair has a tendency to move differently in certain periouds during the day.
It is your job as a forex trader to really know what is the best time of the day to trade the currency pair and take advantage of that.
For example, GBPUSD currency pair can move 100-150 range when the forex market is in the London Session and the New York Session.
But when the forex market hits the Asian session, the volume drives up, volatility decreases and it does not move much at all.
But USDJPY will be different because that’s when Japan and the Asian countries wake up to trade forex and market does move quite a bit in the asian trading session for USDJPY.
Step 4: Choose Additional Trade Confirmation Tools
Getting caught out in a false market move is not a pleasant feeling. So what do traders do?
They need another layer for confirming if they should buy/sell.
And you can do this using another indicator or by using price action, like reversal candlestick patterns.
For those that love indicators, the stochastic indicator is one popular forex indicator that is often used a a trade entry confirmation.
Step 5: Finding Trade Entry And Exit Points
The tools (forex indicators etc) that you’ve chosen to build your forex strategy around will give you the trade entry points.
And once you’ve got your trade entry points, you should also know when and where to get out.
Exiting a trade can be based on risk:reward ratio. For example, if you risk 30 pips and price reaches 90 pips, you exit. That is a risk:reward ratio of 1:3 or it can be 1:2. It is really up to you.
Or you can exit your trader when your trading system gives the opposite signal. What do I mean by opposite signal?
Well, you are in a buy order and your trade is profitable but then your trading system generates a sell signal. If that is the case, you exit your buy trade with a profit and activate a sell order.
There are lots of ways you can use to exit a trader but you use the method that is comfortable to you.
One method commonly used is to use the trailing stop method.
With the trailing stop method, you trail stop your profitable trade, locking in profits as price moves in favor. Eventually, price will reverse and stop you.
Hopefully, you’ve rode most of that price moves and made a lot of profit before you get stopped out. This method is a good method to “let your profits run“.
Step 6: Calculate Your Trade Risk
You cannot enter a trade without knowing how much you are risking in each trader. Wanting to risk a lot and make more money is a good feeling if your high risk trade pays off.
But what if you lose?
That’s a bad feeling right? Especially when your trading account is sitting at 50%…
Every trade placed has a 50% chance of winning or losing. The less you lose, the more you can last to trade forex. The more you lose, the smaller your trading account becomes and soon you’ll have not money to trade or the available margin becomes insufficient to open a trade.
So how do you manage your trading risk?
By using a stop loss.
I always trader with a stop loss.
If you are designing a trading system without a stop loss, you better be very careful.
Step 7: Demo Trade Your Trading System To See If It Works
Ok, just for the fact that you’ve just designed and created a new forex trading system does not mean you are going to make money with it.
You need to test it…you need to demo trade it for a while.
How long? Maybe 3-6 months at least and see how profitable it it.
Demo trading allows you to pick weakness in your trading system during live market trading virtual money.
Thanks for many forex brokers, demo trading is provided free of charge. All you need to do is go to a forex brokers website and resister for a demo trading account and you’ll have a demo trading account up and running in no time.
After you are confident that your trading system works then open a live forex trading account and start trading for real.