4 Tips for setting up a Good Forex trading System

 

One thing that comes to our mind while we are trading Forex is - Do we have a right trading System

The point to be noted here is Does all right trading systems makes money. If it is so then the same will be followed by everyone which will lapse the opportunities in the market

When i was starting a business, a wise man told me every step you take will have impact on your business and its growth. So take all the inputs provided by others and make a informed decision. The same thing can be even applied for Trading too, You can not blindly trade on others suggestions. One should create their own Forex trading system

So Firstly you are still confused about what is a trading system?

Ya, Let me give you the basic outline about trading system - It could be defined as a set of rules based on which you take a trade

Example: I have a trading system which says that you have to buy only when this particular technical indicator gives  a buy signal

On a broader level, let us classify that into 3 factor which can be contributing to a Forex trading system

• Technical indicators - There are different technical indicators like RSI, Stochastic, Parabolic SAR, Moving averages etc etc. So the indicator which you follow strongly should give you signal either to buy or sell
• Fundamental Factors - Lets say there is an even comming tomorrow by Fed Policy which have impact on global markets. Suppose if you have a system which says you should not take hefty positions when there are global events which creates huge volatility then you should be taking only lighter positions
• Behavioural Factors - It could include Risk management, entering into good risk reward trades and managing your money properly. Example a particular trade has given a buy signal as per technical indicators. As per your risk reward it should be minimum 1:2 but actually its only 1:1. If you enter into that trade, you are acutally violating your own comprehensive trading system which also includes risk reward

Since Forex market is huge, your goal is to own a slice of that and create a profitable trading system. But as discussed there is no standard Forex trading system, it should be developed through ones own expereince. 

But is it so easy for a novice trader to build a profitable trading system. Practically not! 

Becasue you take any Successful Forex trader , they have atleast 5-10 years of experience in the market. They have gone through different cycles of market, experienced the impact of different global econonmic and social events

Since Novice traders do not have experience, atleast they should learn from the mistakes of the experienced traders

Earlier we discussed just what is a forex trading system. Now we will understand what features are required for building a successful forex trading system

• Simple: The Forex trading system should be simple. Dont complicate with too many indicators on your system. To give you an example, once a met a trader. He has shown his terminal and trading system where  there are almost 10-15 indicators. Surprisingly i could even not find the price which is being overlapped by too many indicators. So Just follow 2 or 3 indicators, thats it! 
• Objective: The objective of Forex trading system should help you to minimize your losses and increase huge potential gains. This need a constant review your trading system and improve it with your experience. It should also help you to outline where the long term trend is heading, when you focus on long term trends you will get more confidence to trade and also make big profits. Remember this, big money is not through timing the market but being patient 

So Now we will discuss some real tips in building a good forex trading system

• Define a Set of Rules: As we have already discussed above that the system should be simple, we define some set of rules according to our style. So the rules can include all the technical, funamental and behavioural factors which we discusses above. Lets consider few examples
• I will be initiating a buy - When a MACD crossover from below 
• I will be initiating a buy - When MACD crossover from below and RSI is trading at 30 levels (Both conditions to be satisified)
• I will be initiating a buy - When the Risk reward of that trade is atleast 1:2
• I will be allocating only 20% of capital - if the risk reward is below 1:2
• I will be allocating 80% of capital - if the risk reward is 1:5
• I will not be taking any trade when global events happened like FED policy
• Timeframe: When you trade it is very important to note that, a trade can be a Buy on a lower timeframe but a Sell on a higher timeframe. So your system should keep tracking the larger trends -> Monthlly -> Weekly -> Daily -> 30 min -> 5 min
• Breakout Trades: (This is also a technical indicator but very important and powerful hence taking this as separate tip) This is one which i prefer for novice traders because it gives a clear trend identification and simple to trade. Ofcourse there is a risk of false breakout. How to avoid false breakout is analyse that before breakout it should form some Build up which could be Uptrend, downtrend or consolidation - Only then you take a trade, lets discuss in detail
• Downtrend - Before breakout, a downtrend should be formed i.e the price should create lower highs and lower lows. Breakdown of that is a good trade
• Uptrend - Before breakout an Uptrend should be formed i.e. the price should create higher highs and higher lows. Breakout of that is a good trade
• Tight Consolidation - Before breakout, a tight consolidation in a range indicates a brekout
• Note: Neverthless, you still keep stop loss and trade.     
• Time Management: Ensure your Forex trading system should not give too many buy calls and sell calls which lead to complete mess. So manage your time efficiently. This can come over the period of time through experience

Conclusion: Try to keep your system simple and easy to trade, all we want at the end of the day is to make profit and do some good trades.  There is no indicator which is bad or best, every indicator has its own pros and cons. Just try to understand that its uses and application in the real market

Comment your trading system which you use. Have a great day