6 Steps to Creating a Trading System

This lesson's main goal is to walk you through the process of creating your own FX trading system.

It doesn't take long to come up with a system, but it does take 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: Establish a timeline

When designing your strategy, 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 even annual basis？ How long do you intend to keep your possessions？

This will assist you in deciding the time frame to trade on. Even though you will still look at numerous time frames when looking for a trade signal, this will be the primary time frame you will use.

Step 2: Look for indicators that can help you spot a new trend.

We should employ indicators that can help us spot patterns as early as possible, since it is one of our goals.

Moving averages are one of the most used indicators used by traders to identify trends.

They'll employ two moving averages (one slow, one fast) and wait for the fast one to cross over or beneath the slower one.

A “moving average crossover” mechanism is built on this foundation.

Moving average crossovers, in their most basic form, are the quickest way to spot new trends. It's also the most straightforward method to recognize a new trend.

There are numerous other ways for forex traders to identify trends, but moving averages are one of the most straightforward.

Step 3: Look for indications that can assist you CONFIRM your trend.

Our system's second purpose is to be able to prevent whipsaws, which means we don't want to be caught in a “false” trend.

This is accomplished by ensuring that when we see a signal for a new trend, we can validate it with the help of extra indicators.

Many good technical indicators, such as MACD, Stochastic, and RSI, can be used to confirm trends.

As you get experience with numerous indications, you will discover which ones you prefer and can add into your system.

Step 4: Determine the level of risk you're willing to take.

It's critical to determine how much you're willing to lose on each trade while designing your forex trading method.

Many individuals dislike talking about losing money, but a competent trader considers how much money he or she could lose before considering how much money they could win.

You will be willing to lose a different amount than everyone else.

You must evaluate how much breathing room is needed to offer your transaction some breathing room while not risking too much on one trade.

In a subsequent session, you'll learn more about money management. How much you should risk in a single trade is heavily influenced by your money management.

A trader should always consider the possibility of loss before considering the possibility of profit.

Step 5: Define Entry and Exit Points

After 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 profits.

Entries

Even if the candle hasn't closed, some people like to join as soon as all of their indicators line up and give a good signal. Others like to wait until the candle has burned out.

Others like to wait until the candle has burned out.

One of the forex traders at WikiFX feels that it is advisable to enter a transaction after a candle has closed.

He's been in several instances when he's in the middle of a candle and all of the indicators are in sync, only to find that the trade has completely reversed on him at the candle's closing!

It's all a matter of personal preference when it comes to trading. Some people are more aggressive than others, and you will discover what type of trader you are at some point.

This trader's entrance, for example, was when the candle closed below the support line in the chart below.

Exits

You have a few alternatives when it comes to exits.

One method is to trail your stop, which means you move your stop if the price advances in your favor by 'X' amount.

Another option is to set a target and exit when the price reaches that level. It's entirely up to you how you compute your goal. Some traders, for example, set their sights on support and resistance levels.

The exit is set at a certain price at the bottom of the falling channel in the chart below.

Others simply choose the same number of pips (fixed risk) on each trade.

Whatever method you use to compute your goal, be sure you stay to it.

Whatever happens, never leave early.

Maintain your trading strategy!

After all, it was created by YOU!

Another technique to escape is to create a series of criteria that, if met, will notify your departure.

You may, for example, set it a rule that if your indicators revert to a specific level, you should leave the trade.

Step 6: Make a list of your system's rules and stick to them!

This is the most crucial step in the process of developing your trading strategy. You must put out your trading system rules and adhere to them at all times.

One of the most crucial qualities a trader must possess is discipline, therefore remember to stick to your method!

If you don't follow the rules, no method will ever work for you, therefore remember to be disciplined.

Did we mention that you should ALWAYS follow your rules？

How to Put Your Forex Trading System to the Test

Finding a charting software package that allows you to travel back in time and move the chart ahead one candle at a time is the quickest approach to test your system.

You can follow your trading system guidelines and take your trades as you move your chart forward one candle at a time.

Keep track of your trades and BE HONEST WITH YOURSELF!

Keep track of your victories, losses, and average win and loss. If you're satisfied with your results, you can move on to the next step. On a demo account, you can trade live.

For at least two months, trade your new system live on a demo account.

This will give you a sense of how to trade your system in a shifting market. Trading live versus backtesting is a totally different experience.

You'll know if your strategy can actually stand its ground in the market after two months of live trading on a demo account.

If your method is still giving you solid results, you can trade it live on a real account.

You should now have complete confidence in your forex trading method and be able to take trades without hesitation.