Operating in the financial markets carries many risks, including the most important: the risk of making a wrong decision. The dream of any operator is to find a trading method that always works correctly. A trading system is a necessary condition to enter the market, and this system must be profitable, of course. When newcomers enter the market, they are often overwhelmed by the large amount of information available and the difficulty in assimilating it.
Step 01: Type of trader:
The first and foremost step is to identify the type of trader inside you.
The first thing you need to decide when creating your trading system is to know what kind of operator you want to be. Do you want to be a 1-day or 1-hour trader? Would you like to observe graphs every day, every week, every month or even, every year?
How long would you like to keep your positions open?
Answering these questions will help you determine what timeframe to use in your operations. Although you can also analyse graphs with different time periods, this will be your main time frame, which you will use when looking for signals to open or close positions.
Step 02: Factors to discover new trends:
Since one of our objectives is the identification of trends as soon as possible, we must use technical analysis indicators that can achieve it. For example, moving averages are one of the most popular indicators that operators use to identify trends. We usually use two moving averages (one slow and one fast) and wait for the fast crossing to the slow above or below. This is the basis for what is known as a system based on the crossing of moving averages. Of course, there are many other ways to find trends, but the moving average crosses are one of the easiest to achieve.
Step 03: Parameters that confirm Forex trends:
The second objective for our trading system for Forex is that it can avoid false signals and thus avoid falling into false trends. The way to do this is to make sure that when we see a signal of a new trend, we can confirm it using other indicators. There are many indicators that confirm trends, such as: MACD, Stochastic and RSI. As you feel more familiar with the indicators, you will find some that you will prefer over others and that you can incorporate into your system.
Step 04: Defining risks and rules:
When developing the system, it is very important that you define how much you are willing to lose in each operation. Very few like to talk about losing, but, a good operator thinks first of what he can eventually lose before thinking about how much he can earn.
The amount of money one is willing to lose is very different from one trader to another. You must decide how much space is enough to allow your operations to breathe, but at the same time, do not risk much in a single operation.
Step 05: Define inputs and outputs:
Once you have defined how much you are willing to lose in an operation, the next step is to discover where to place the closing of an operation to obtain the maximum possible benefits.Some people like to enter as fast as they can in a trend when their indicators give a good signal, even when the candle has not closed. Others like to wait until the candle closes.
In my experience I think it is better to wait until the candle closes before making an entry. I have been in many situations where I am in the middle of the candle and all my indicators fit, only to discover that at the close of the candle, the operation turned against me. But you can have a different opinion when you have some experience. It really is just a style of operation. Certain people are more aggressive than others and you should go slowly realizing what type of trader you are.
For closures or exits from the market, there are different options. One way to close is to place a stop loss, this means that if the price moves for your favour in “X” amount, you move the stop loss for that “X” amount.
Another way is to determine a level and exit when the price reaches that level. How to calculate that level, it depends on you. Some people choose levels of support and resistance for it. Others, only choose the same number of pips in each operation. Anyway, calculating the target level is up to you, just make sure it is the optimum for you and hold on to it. No matter what happens, never leave before.
Another way to get out is to have a criterion that gives you a signal that allows you to leave. For example, you can create a rule in which, when your indicators are marked a certain level, you leave the operation.
Test your trading system:
Discipline is the most important feature that a Forex trader should have, so always stay true to your system! Only then you can detect possible errors and improvements but step by step, try, retest, draw conclusions and make change. Test your trading system to observe it’s pros and cons. Follow the rules of your new trading system carefully to obtain good results.
The fastest way to prove the effectiveness of your trading system is to open a demo account with an online broker. You can access the trading platform and the graphics where you can go back in time and move the graph forward little by little to see if your system would have worked well. The ideal would be to be able to advance sail to sail. When you move the chart candle to candle you can follow the rules of your trading system and analyse what would be the result of your operations according to it. You can write down the history of your operations and be honest with yourself.
Save profits, losses, average gains and losses. If you are happy with the results, test your system in the demo account for a reasonable period. A period of at least two months is recommended. This will give you an idea of how you can operate with your system when the market moves. You must believe that there is a big difference when you operate live, that when you only do tests.
After a couple of months of operating in demo, you will be able to find out if your system is reliable for the market and move on to using your system in a real trading account. At this point, you must have confidence and feel comfortable with your system to open operations without hesitation.
Operators spend many hours a day working on their computers and waiting for the right moment to make a transaction. Of course, they cannot perform at their best always. Most operators conclude that their actions violate their own trading rules.