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TE03 - Design Your Trading System in 6 Steps

"Designing a forex trading system is something that will take time. Not every forex trader is able to get a level where they can design their own trading strategy. There are a number of things that you as a trader should be aware of before building a trading system. If you have come to a point where you can design your trading system, then congratulations. We expect that you already know quite a bit about the markets and the technical aspects of trading. Once you are at a stage where you want to design your trading system, this article will help to act as a guideline in terms of assisting you in designing your trading system. There is nothing complicated about building a forex trading system. You just need to apply some common sense and logic in order to have your own customized trading system that you can trade for yourself."

Building a trading system might seem like a complex affair. Yes, it looks that way initially. But this is partially due to the fact that traders do not quite understand all the concepts of trading.

If you look around some forex forums, you will find trading strategies that promise to make you rich. Yet, many fail at it. A forex trading system is unique and should be individual to your requirements. If you think that you can use a ready to trade system then you wouldn’t go too far as a successful forex trader.

In this article, we show you how you can design your own forex trading system in six simple steps.

1. Know your instruments

The first step in designing your trading system is in understanding the type of instruments that you want to trade. As a forex trader, one might assume that you will be trading just currencies.

However, you can also trade a number of other instruments such as CFD’s, precious metals and indices to name a few. Understanding the instrument you want to trade plays a big role. This means that you need to pay attention to factors such as the economic analysis, the volatility of the instrument and so on.

Many traders make the mistake of building a trading system that can be applied to all markets. This shouldn’t be the case. You should use one trading system for one instrument alone.

2. Know your timeframe

Understanding what time frame you want to trade is important. Some trading systems work well on the daily chart time frame, while a few others work best on an intraday basis.

You should build a trading system that is best suited for your personality. Some traders prefer swing trading, which means that trading on the longer term charts is more ideal. Whereas day traders prefer to trade on the short term markets time frame.

Knowing which timeframe works best for you will help you to build a trading system accordingly.

3. Know your indicators

Many traders tend to clutter their charts with too many technical indicators. In many cases, they end up using different technical indicators which basically determine the same information.

Using such redundant technical indicators is pointless as it will not give you any edge. Therefore, one of the important things to bear in mind when designing your trading system is to have a good understanding of the technical indicators that you are going to use. This allows you to get rid of redundant indicators and focus on the ones that can generate good market information for you.

Sometimes, keeping it simple works best.

4. Find your risk tolerance

Your risk tolerance also plays an important role in designing your trading system. Some traders prefer to trade with a larger stop loss while others prefer to keep their stops tight. Regardless of which category you fall into, it is essential that you keep track of your risk tolerance and build a trading system accordingly.

Every trading system is unique and thus, you should ensure that your trading system is designed to suit your risk tolerance rather than find a black box trading system or something that already exists in the markets.

5. Putting it together

Once you have the technical indicators, the time frame, your risk tolerance and of course the technical trading instruments, the next step is to build it together. Once you have a good trading system in place, it is time to back test the strategy.

The ideal way to do this is to apply the indicators on the chart and look for buy and sell signals based on the trading rules. Then make a total list of the profits and losses that could occur alongside the number of trades.

This will give you a basic idea on how well your trading system is going to perform. Remember that there is no best trading system in the world and losses are common. It all comes down to your risk management.

6. Tweaking your trading system

Once you have your system in place, it is time to put it to the test. Ideally, you should test your system for at least a few months on a demo trading account. Alternately, you could also look for a micro-cent account that will allow you to trade with just $1.

This will keep your losses short while allowing you to test the markets with real time data. A basic of three months of test is required alongside maintaining a trading journal. This information will give you a lot of food for though.

A trading system needs to be constantly tweaked. You should also pay attention to whether your trading system works best in a trending or a sideways ranging market.

Read 978 times Last modified on Friday, 26 July 2019 16:21