There are several goals we want to achieve by creating a system for Forex trading:
1. Find the entry points as soon as possible.
2. Find exit points for maximum profitability.
3. Avoid false input and output signals.
If these conditions are met, these three objectives will lead to a profitable trading system.
So, where do I start?
Choosing your time period
This is the first step where you need to answer yourself: how many hours do you want to trade? Would you prefer to stay in front of the monitor for several hours, trading on short (5, 15, 30 minutes) timeframes, which will require constant market control and quick reaction, or would you rather control the charts several times a day?
This is, to a large extent, a question of comfort and free time that you have at your disposal. Whether you can fully devote yourself to working on Forex, or do it only a part of the time. When developing your system, you need to choose the most convenient and profitable option.
Selection of trading instruments
There are many trading tools and indicators available to Forex traders, but not all of them can give the fastest signal about upcoming trading opportunities. And the purpose of the trader, of course, is to enter the trade as early as possible and take advantage of the maximum price movement.
Among the indicators that can provide traders with an early signal of impending changes and possible trading opportunities are EMA (Exponential Moving Average), SMA (Simple Moving Average), Parabolic SAR; Fast, Slow or Total Stochastic, MACD and others. The key point here is that the trader should fully understand the principles of their work in order to be able to take advantage of the maximum advantage of the signals issued by these indicators.
One common way to determine the direction of travel as quickly as possible is to use Moving Averages. A simple strategy such as using the 5 and 10 EMA crossings will show the direction of movement and a new trading opportunity at an early stage.
Another example would be the intersection of Stochastic lines or the intersection of MACD levels. Stochastic and MACD also use moving averages.
By combining indicators on one chart and experimenting with indicator values, traders can create optimal and fastest ways to identify trading opportunities early.
Choosing a currency pair and finding its active trading hours
Currencies have their own characters or behavior. Some are extremely active, such as GBP/USD or GBP/CHF, some are quite consistent with stable volatility like EURO/JPY or EUR/GBP.
Different indicator settings, different values can be used to achieve the best results for each currency pair.
Also a good idea is to find the most active watches for the chosen pair. The hours of the greatest currency activity can be easily determined on the chart and you should use it to get the maximum profit during the trading session. The economic Forex calendar should also be taken into account, as different events affect the price movement.
Selection of additional trading instruments to confirm signals
Once we have chosen a timeframe, indicators and currency pairs that meet our requirements and capabilities, the time comes for the most decisive step. This is finding additional instruments/indicators that will confirm the signals received earlier and give either green light for action or save the trader from error.
How to use any additional indicators, but they are better known. For example, add one or two other values to the two EMAs. You can use RSI, SSI, Fibonacci and others. In addition to the standard indicators, there are many interesting indicators suitable for this purpose. Improvisation, study and testing will lead to the selection of the best option.
Finding entry and exit points
Once the indicators are selected so that everyone gives and the other confirms the signal, it is time to see how far you can go and how much to earn.
A trader can enter as soon as the signal is confirmed, or to find a better entry point, he can switch to a smaller timeframe and enter at the most advantageous point.
There are two main entrance styles. The first entry is aggressive, without waiting for the current candlestick to close. The second method is to wait for the candlestick to close and, if the conditions have not changed and the signal remains valid, open a trade. This method is more careful and prevents unnecessary erroneous inputs.
For exits, a trader can either set the amount of money he wants to earn on a trade (e.g., 25 pips) or use trading tools that help set profit targets (Fibonacci levels, Pivot Points). It is possible to use trailing stop (usually after some profit has been achieved), instead of closing the current position to achieve possibly greater results.
Another logical way to set up protection is to place the Stop Loss depending on the market volatility at any given time. For this purpose, traders use the Bollinger Band tool, which creates so-called “corridors” around price actions. Wider corridor, higher market activity and vice versa. By measuring the width of the corridor (in points) at the time of entering the transaction, the trader can easily set a stop from the range of market fluctuations and thus protect himself from so-called “market noise”.
When opening a new position, it is also important to calculate in advance how much you are willing to lose if the market goes against you. Although the overall goal is to create a better working system, losses are inevitable and so you need to be prepared to tell us where you will drop your trading and reduce your losses. It’s just as important as starting any Forex trade at all.
Calculation of risks in each transaction
The golden rule of Forex is to know what is your risk and reward in every trade. A serious trader will only trade if the risks are at least half as low as the potential rewards. For example, the required risk/reward ratio is 1:2. There are forex trading strategies only with a ratio of 1:3.
Therefore, before clicking on the button to open a new position, the trader must determine the level/point at which he will close the trade if there are losses. Tools such as Fibonacci and Pivot Point can help you do this before you enter the deal. It is also important to decide whether this will be a manual or automatic closing by placing a security order.
Trading on demo account to check the system
After this long journey and fruitful research it is time to see if the system has the right to exist. Test, improve and finally write down the steps, settings and rules that will be used for trading. Once you’ve recorded the system, it’s time for a serious test.
It is highly recommended that you trade demo for at least 3-4 months. Among the numerous reasons for this is that the currency market has several periods during which its behavior can change significantly. For example, there was a good one-way movement of the market for a few months while you were testing your system, then you decide to open a real account, but the market changes and the flat (sideways movement) begins. You haven’t tested your system under such conditions, and it would be very disappointing to find out that your system doesn’t work, as it does with a trend. Demonstration trading time also depends on the trader’s experience. It is also important to bring your demo account as close as possible to real trading on deposit and targets. Once the task is completed, you can think about trading with real money.
Good luck creating your best Forex trading system!