In the previous article, you have learned about what a mechanical trading system is . Well, the main focus of this article is to guide you in the step-by-step process of creating your own forex trading system . Although it does not require a lot of time to make a system, but to test the trading system it absolutely takes time. So in this case your patience is needed.
There are seven steps that you must run in building a mechanical trading system.
Step 1: Determine the time-frame
The first thing you have to set when building your trading system is to determine what type of trader you are. Are you a day trader ? Swing trader ? Do you like to monitor charts every day, once a week, or maybe once a month? When you trade, how long do you usually hold open positions?
The elements above will help you determine what time frame you will use. Although for example you want to transact using the multiple time-frame analysis method, determine which main time frame you usually use to find entry signals .
Step 2: Determine the trend indicator
Because the main purpose of a trading system is to identify trends as early as possible, you should use indicators that can meet these objectives. For example moving average (MA), which is one trend indicator that is quite popular.
Traders usually use two MAs with different periods and wait for the intersection between the two MAs. This method is a basic method known as the “MA crossover” method. The simplest technique of this method is the quickest and easiest way to identify potential trend changes.
Indeed there are many other methods in forex trading to recognize trends, but MA is one of the easiest to use.
Step 3: Use indicators that can confirm trends
The second target of a trading system is to be able to avoid whipsaw .You certainly don’t want to be trapped by a fake signal. One way to avoid this is to make sure the signal that appears has been confirmed with the direction of the trend that is going on. Signal confirmation usually uses an indicator that includes a momentum group or an oscillator .
There are many technical indicators that can be used as signals that confirm the trend. Market Analyst Team usually uses stochastic and CCI. Besides that you can also use MACD or RSI. Please try several types of indicators. If you are used to it, you will find out which indicators are suitable for your trading style and enter into the trading system that you have built.
Step 4: Set risk limits
In building a trading system, it is very important to determine the level of tolerance or risk limits. Indeed not many people like to talk about losses, but in reality a good forex trader is a trader who is able to think to limit how much loss he might suffer. They always think of risk first before imagining how much profit they can get.
The level of risk tolerance for each person is different. You really have to set a risk limit but still need to be within your own “comfort” limit. So do not be round to imitate other traders whose tolerance is higher than you.
This is closely related to money management, which plays a very important role in forex trading. You can read many topics about money management on this website.
Step 5: Determine the entryand exit rules
After you set a risk limit, the next step is to set entry rules (open positions) and exit (close transactions).
There are traders who open positions after all the indicators used are seen giving a signal even though the candlestick has not closed . Others prefer to wait until the candlestick closes .
We ourselves followed the second opinion, which is to wait until the candlestick closes, because often it turns out that technical indicators change after the candlestick closes and the signal that had previously been confirmed has “disappeared”.
But actually it’s just a matter of trading style. Traders who don’t feel the need to wait for candlestick confirmation are usually an aggressive type of trader.
Meanwhile there are several options for exit rules. One way is to use a trailing stop . Another way is to set targets and only close the transaction when the target has been reached. Many use support and resistance as target targets, while others only set targets in the form of pips.
You can also use “counter-signals” as exit rules. For example if you enter a buy position based on the MA golden cross (MA cuts from the bottom up), then you will only close the position if there is an MA death cross (MA cuts from top to bottom) and vice versa.
Oh yeah, remember that the exit rule is not only valid when profit is made. You also have to apply the exit rule when a loss occurs .
Whichever option you choose, make sure you always run it. Never open or close a position too quickly before the conditions or rules that you have set are met. Whatever happens – yes, ANYTHING HAPPENS – stick to the plan !
Step 6: Write down the rules of your trading system and COMPLY!
This is the most important step in creating a trading system. Write down the rules of your trading system and always obey. Once again: ALWAYS COMPLY . No matter what!
Discipline is one attitude that a trader MUST have. There is no trading system that works well if you are not disciplined in obeying the rules of the trading system.
Step 7: Test your Trading System
The easiest way to test the trading system you just created is to use the Strategy Tester available in MetaTrader. This method is commonly called backtesting . Apply all the rules of your trading system with honesty and discipline. This is important. Very important.
Use enough price data. At least use two or three years of price movement data so you know whether your system can follow market dynamics or not. If your backtesting results are satisfactory, proceed to the second testing phase, namely forward testing using a demo account .
Do forward testing for at least two months. This will provide an opportunity for you to “feel” the performance of your trading system live. In addition, your patience and discipline will be re-tested with market movements in real time.
After two months, you will find out if the system can really be used. If the demo account results are still satisfactory and you are confident enough with the trading system that you created, then the next step is to apply it in the real account.
Congratulations! You have successfully created your own forex trading system .