Hello and welcome to another episode of the bulls versus the bears. Today we are going to learn how to create your own forex trading system from the bottom up. No, we are not going to create a prototype space rocket. We are just going to create a set of rules that will act as a guide for you as you trade. In this vast space called life,you need a set of rules to guide you in everything that you do right? It’s no different with forex trading. You need a set of rules for make trading decisions. This way when you trade, you are trading based on sound logic and not scattered emotions.
Your trading system is also designed to help you wait for solid confirmation of trade and exit signals. Thanks to your trading system, you can quickly locate good entry points, profit-maximizing points, and avoid fake entries and exits. Even more important, you must follow your trading system to the letter.Straying from this system could be very detrimental to your trading prospects.
So what are we are going to do? We are going to go through five steps for creating your prototype forex trading system. The first step is:
Decide Which Time Frame You Are Comfortable With
You need to decide which time frame you are comfortable trading with. The last thing you want to do is to pick a time frame which goes against your trading personality. If you are the type who like to trade quick and fast, then the M1, M15, M30 time frames are just what the doctor ordered. However, you may be forced to stare at the screen like a security guard all day looking fo those quick trades. Even worse, getting solid trade signals are very rare on these time frames. And it may cause you too much stress.
However, if you don’t mind waiting a day or two or even longer, the H1 H4, daily , monthly, or then longer time frames would fit you just fine. The H1 is more popular among most traders for its flexibility. You can trade any type of trading system within this time block. What you need to understand is that there is no specific rule etched in stone as to the best time frame to trade in. It all boils down to what your trading personality is,and how much time you can commit to trading. And please don’t follow the crowd when choosing a time frame to trade in. You will pay dearly for it. You choose a time frame that suits your trading personality and aligns with your trading system.
If you ‘re trying to figure out which time frame to choose, look up Looking At The Big Picture Using Multiple Time Frame Analysis.
Even more important, you choose the currency pairs you are comfortable with and what hours they trade. If you are the type who does not like staring at the screen all day you just set the trade, leave the house and let the market do its work.
Decide Which Trading Tools To Trade With
You need to decide which tools you are going to trade with. These tools should be trader-friendly such that you should be able to identify trading opportunities at the speed of light. Not only should you choose trading tools that you are comfortable with, but you should be proficient using these tools.For our purposes, since we are using raw price data, the most obvious tools to use would be price action and candlestick patterns. And as you well know,we just finished a series on interpreting candlestick patterns.If you missed those posts, I suggest you go back to them pronto.
Just to remind you, we covered Fundamentals of Reading Candlestick Patterns, Single Candlestick Patterns, Dual Candlestick Patterns, and Triple Candlestick Patterns. So if you missed any or all of these posts ,acquaint yourself with these posts as soon as possible.
Another effective tool you could also use is Moving Averages. Just to remind you, moving averages help ascertain the potential direction of trends. And most of you are aware that we did a two part series on moving averages.So if you want to refresh yourselves on Moving Averages, check out Moving Averages parts I and II. And for your information, you can use all of these tools if you so choose.You don’t need to get hung up on just one tool. Who does that anyways?
Anyways Next Up:
Decide How Much You Can Afford To Lose?
As some of you know by now .not all forex trades end up as profits. So you need to decide quickly how much money you can afford to lose on a given trade without shedding tears over it. In so doing it helps you stay within your risk limit. Even more important, it keeps your emotions in check,especially when you are tempted to jump back into the market after losing out on a trade. This is where risk management and position sizing come in real handy.
Speaking of which? have you read my recent post on Risk Management? If you havent, do so as soon as possible if you do not want to risk your whole account go up in smoke.
Make Up Your Mind When To Enter And When To Exit
You have to make up your mind when to enter and when to exit. In other words, decide when to enter and when to exit each trade. The price action on the price chart usually does a good job of alerting you of a good entry point. The logical solution will be to wait until the candle signalling the trade has closed.
If you want to adopt a cavalier approach, you can make your entry before the candle closes. However, you could be committing suicide as the market could easily do a 360 on you and swallow your trading position like a whale swallows seaweed. And as I’ve said before the forex market has a mind of it own. It’s very unforgiving towards adventurous traders who think they’re smart. So don’t make outsmarting the forex market part of your trading system. For more information about how to enter and exit trades, read up on Find, Enter, and Manage Forex Trades.
Last But Not Least:
Test Your Trading System
You’d be crazy implementing your trading system without testing it first. It’s a no brainer. It’ll be like buying a shotgun without testing first. You have two options. You can back test your trading system through a strategy testy.Or you can use the manual route by recording possible trade entries and exits.Considering that we’re working with raw price data, I suggest the latter. Why?You want to get a natural feel for how your trade entries are working. Not to mention the fact that you also want to get a close understanding of the workings of your trading system. Which is exactly what you are aiming for right?
If you are satisfied with the test results you then try your trading system on a demo account to get a feel for the trading system.You also want to get a virtual feel of how to try out your trading system as you are trading in a live environment
By now you should be close to getting satisfied about the results from testing your forex trading system right? Well if you are satisfied, clap for yourself. Because you are now ready to graduate to trading with a real account. But if you still have any lingering doubts, put your decision to trade on hold. Keep tweaking your trading system and retest it until you are satisfied with the results.
That’s a wrap for ”How To Create Your Own Forex Trading System From the Bottom Up.” Creating your own forex trading system is not rocket science. You are just creating a set rules out of the trading concepts that you’ve been studying. So long as you follow all the rules of your forex trading system, you will experience forex prosperity for the rest of your natural life. If you decide to ignore your trading system and trade on a crazy whim, you’re asking for trouble.
Til next time take care.
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