Forex trading system that works is different for each trader, if you are a beginner Forex trader then test your trading system software in a demo account, To become a successful Forex trader, you need to setup a good trading system for yourself as like as Fxstay traders. It is not at all difficult to setup a trading system for yourself but what is difficult is to follow the rules of your own trading system. A good trading system should be ready to achieve two main goals and these are the identification as of the trend soon as possible and avoiding from any whipsaws. If you can achieve these two goals in your trading system then you are guaranteed to close maximum trades in profit. These two goals contradict which makes the achievement of the goals difficult.
Goals of your Forex Trading System that works
If your trading system catch trends only then you will get fake signals many times because all the signals given by the indicator may not be correct and if your trading system can avoid whipsaws only then you will not able to catch the price movement at right time. This way it will become difficult to earn maximum profit or earn profit more than loss. So you should aim for a trading system that is not only able to identify the trends but should also be capable to distinguish between the real signals and the fake signals.
Steps of setting up a Trading System that works
It does not take much time to setup a trading system but it needs sometime to test it completely. Have patience to test your system completely because a good trading system has potential of giving you profit in the long term period. To setup a good trading system for yourself, you need to follow six important steps. These important steps are time frame, find those indicators that can help you in identifying a new trend; find those indicators that can confirm the identified trend, define your risk for your trades; define the way to calculate your entry and exit positions, define the rules of your Forex trading system and follow it.
The time frame in your trading system should be according to your trading activities. So you must know which type of trader you are. If you like to see some profit by the end of the day then it means you are a day trader so fix your time frame in your trading system accordingly. If you like pull out profit every week or month then it shows that you are a short term trader and so the time frame in your trading system should also be according to your short term trades. If you can hold a trade for as long as 1 year or more then it means you are a long term trader and so the time frame of your trading system should be according to your long term trades then you can say that Forex trading system that works for you.
Find those Indicators that can help you in Identifying a New Trend
It is better to find out the indicators that can help you in identifying a new trend as quickly as possible. Moving Average Crossover is the most popular indicator that helps the traders to identify a new trend speedily and easily.
Find those Indicators that can help you to Confirm an Identified New Trend
After you have identified a trend and got a signal to trade, you must make sure that you have not got a false signal. This confirmation can be done with the help of a Confirmation Indicator so this step requires finding out an Indicator that can help to confirm a trend. RSI, MACD and Stochastics are good trend confirming indicators.
Define your Own Risk
This is the next important step in developing your own trading system. You must decide how much you can afford to loose in a single trade and provide this information to your trading system. A good trader is one who first thinks about his or her potential loss before thinking of a potential win. You should risk your trade to some extent so that your trade can have space for profit but not risk your whole investment in one trade only. A good trader does not prefer to risk more than 2% in one single trade.
Define Entry and Exit Positions
Defining of Entries and Exits is the next important step after defining the risk to earn the highest level of profit or minimum loss. Different traders have different trading styles for finding their entries. Some prefer to enter as soon as the indicators in their tools match up and indicate a good signal and the others may prefer to not to trade before the candle closes. The chances of profit are maximized if you can wait to see the close point of the candle. Different traders also have different trading styles for finding their exits. Some traders trail their stop and some exit by setting a target. Some may use Support and Resistance as their targets and the other may select the amount of pips. You can select any of these trading styles that you feel as the most useful but the important point to remember is to follow the trading style that you have selected.
For example, let’s select a timeframe of a daily chart. Your trading system will contain trading on a daily chart. 5 EMA and 10 EMA will be used to the close. Stochastic and RSI Indicators should be used. Consider Stop Loss of 30 Pips and follow some entry and exit rules similar to those as below then you can say that Forex trading system that works for you.
Enter long if 10 EMA line is crossed by the 5 EMA line and the 5 EMA line and stochastic lines are moving above. Enter long if RSI is more than 50 but stay away from entering long if the stochastic lines are in the overbought area.
Enter short if 10 EMA line is crossed by the 5 EMA line and the 5 EMA line and stochastic lines are moving below. Enter long if RSI is less than 50 but stay away from entering short if the stochastic lines are in the oversold area.
Exit only when the 10 EMA line is crossed by the 5 EMA line in the direction opposite to that of your trade. RSI if moves back to 50 is also a good indication to exit then you find out the forex trading system that works .
Define the Rules of Your Trading System That Works For You And Follow It
So you have made some rules for your trading system and it is important to stick to those rules. Those traders and investors can never succeed who fail to follow their own rules.
Test your Trading System Software
After you have developed a trading system for yourself, you must test your system completely. You will have testing done in three phases. These phases are explained below.
Test your Trading System by Moving Back in Time
To make your testing faster, you can use a software package and move back in time. After you have fixed a position from where to start testing, then move forward by one candle at one time. You can follow your rules that you set early and check in your trades. Be honest with your test results and honestly record your wins, average win, losses and average loss. If you get favorable results from the first phase, then move to the next phase until the Forex trading system that works for you pass all tests.
Test Your Trading System with a Live Demo Account
This is the second phase of testing where you should test your trading system with a Live Demo account and move to the next step only if you get the favorable results. The benefit of this phase is that your trading system will be tested with the Live Market. After test on a demo account you can use it on real currency trading account.
Test Your Trading System with a Live Real Account
This is the last phase of testing where you should test your trading system with a Live Real account also then the Forex trading system that works for you. After getting favorable results in the last phase also your confidence level will be high and you will comfortable and ready to take your trades.