After learning how to create your own forex trading plan and identifying what kind of forex trader you are, it's time to create your own trading system.
How to Create a Mechanical Trading System
So far we've covered how to develop your trading plan, and we've discussed the importance of discovering what kind of trader you are.
Now, it's time to teach you how to enrich your simple trading plan by creating a foreign exchange trading system.
More specifically, we will teach you to create a Forex mechanical trading system.
A mechanical trading system is a system that can generate trading signals for traders to trade.
They are called mechanical trading systems because no matter what is going on in the market, the trader will trade based on it,
which in theory removes all bias and emotion from trading because no matter what the situation is, you will Follow the rules of the trading system. If you Google "forex trading systems" you will find tons of people claiming to have "killer" systems that can be had for as little as a few thousand dollars.
These systems supposedly produced thousands of pips a week in profit and never lost money.
They're going to show you the "performance" of their perfect system, and it's going to make your eyeballs turn into dollar signs, and you sit there and say to yourself, "If I give this guy $3,000, I'll make money. Also, if The system generates a few thousand pips a week, so I can make that $3,000 back in no time."
Slow down, cowboy. Before you hand them your credit card number and complete this impulse purchase, there are a few things you should know.
In fact, many of these systems do work. The problem is that Forex traders lack the discipline to follow the rules of the system.
The second fact is that instead of spending thousands of dollars on a system, you can actually invest the time in creating your own mechanical trading system and save that money as Forex trading capital.
The third fact is that creating a trading system is not difficult, what is difficult is following the rules you set when creating the system.
There are many articles selling systems, but we didn't see any that taught you how to create your own. This course will guide you in the steps you need to take to develop a mechanical forex trading system that is right for you.
At the end of the course, we'll show you an example.
Your mechanical trading system example
I know you're saying, "The goal of my trading system is to make billions!"
While that's a good goal, it's not enough to make you a successful Forex trader.
When creating your mechanical trading system, you should achieve two very important goals:
1. Your system should be able to identify trends as early as possible.
2. Your system should allow you to avoid sawtooth fluctuations.
If you can use your trading system to achieve both of these goals, then you have a better chance of success.
The hardest part about these goals is that they contradict each other.
If you have a system where the main goal is to get ahead of the trend, then you may be fooled by false signals many times.
On the other hand, if your mechanical trading system is focused on avoiding zigzags, you will be slow to move on many trades and possibly miss a lot of trades.
When creating a mechanical trading system, your task is to achieve a trade-off between these two goals. Find a way to identify trends early, but also find a way to help you spot false signals.
6 Steps to Designing Your Trading System
This article aims to guide you in creating your own Forex trading system.
Although it doesn't take too long to create a system, it does take some time to test it.
So be patient, in the long run, a good forex trading system may allow you to achieve high profits.
Step 1: Time Frame
When creating a trading system, the first thing you need to decide is, what type of trader are you.
Are you a day trader, or a swing trader?
Would you like to look at the charts daily, weekly, monthly, or even yearly? How long do you want to hold the position? This will help determine what time frame you will be using to trade. Even if you still watch multiple time frames, this will be the main time frame you use when looking for trading signals.
Step 2: Find indicators that help identify new trends
Since one of our goals is to identify trends early on, we should use indicators that will achieve this.
Moving averages are one of the most popular indicators that traders use to identify trends.
Specifically, they will use two moving averages (one fast and one slow) and wait until the fast line crosses the slow one.
This is the basis of the so-called "moving average crossover" system.
In its simplest form, moving average crossovers are the fastest and easiest way to identify new trends.
Of course, there are many other ways for forex traders to identify trends, but moving averages are one of the easiest to use.
Step 3: Find indicators that help confirm the trend
The second goal of our system is to be able to avoid zigzags, which means we should not follow "false" trends.
Our approach in this regard is to ensure that when we see a signal of a new trend, we are able to confirm it with other indicators.
When it comes to identifying trends, there are many excellent indicators such as MACD, Stochastic, and Relative Strength Index.
As you become more familiar with various indicators, you will find indicators you like and can integrate them into your system.
Step 4: Determine Risk
When building your forex trading system, it is important to determine how much you are willing to lose on each trade.
Not many people are willing to discuss losses, but in fact, for good traders, they consider potential losses before considering profits.
The amount of loss you are willing to take will be different from others. You have to determine how much room to breathe for your trade, but at the same time not take too much risk on a trade.
Later in this course, you will learn about money management. Money management plays a huge role in how much you should risk on each trade.
Traders should consider potential losses before considering potential profits.
Step 5: Identify Entry and Exit Points
Once you have determined how much you are willing to lose on each trade, the next step is to find entry and exit points that will maximize your profits.
entry point
Some people are willing to enter when all the indicators match and give good signals, even if the candle has not closed yet. But some people will wait until the candlestick is over before entering the market.
Forex trader Pip Surfer believes that the best way is to wait for the candle to end before entering.
There have been many occasions where he was in the middle of the candle, all the indicators matched, only to find out when the candle ended that the trade was exactly the opposite of what he expected!
It's really just a matter of trading style. Some are more aggressive and you will eventually find out what kind of trader you are.
For example, in the chart below, the trader's entry point is when the candlestick closes below the support level.
departure point
For exit points, you have a few different options.
One way is to trail your stop loss, which means if the price moves "X" distance in your favor, then you move your stop loss "X" distance.
Another way to exit is to set a target and exit when the price hits the target. How you calculate your goals is entirely up to you. For example, some traders choose support and resistance levels as targets.
In the chart below, the exit point is set close to the lower line of the descending channel.
And some choose to target the same number of pips on each trade (fixed risk).
However, it's up to you how you calculate the target, just make sure you stick to it. No matter what happens, never leave early.
Stick to your trading system!
After all, you created it!
Another way to get out is to set a set of criteria that, when met, will give you an exit signal.
For example, you make a rule that if your indicator reverses and hits a certain level, you get out of the trade.
Step 6: Write down your system rules and follow it!
This is the most important step when creating a trading system. You must write down your trading system rules and follow them consistently.
Discipline is the most important character a trader must have, so you must always remember to stick to your system!
No system will work if you don't stick to the rules, so remember to be disciplined.
Did you notice that I said stick to the rules all the time?
How to Test a Forex Trading System
The quickest way to test your system is to find a charting package that allows you to go back in time and move the chart forward one candle at a time.
When you move the chart one candle forward, you follow the rules of the trading system and trade accordingly.
Keep track of your trading performance and be honest with yourself!
Record profit, loss, average profit, and average loss. If you are satisfied with the results, then you can proceed to the next stage of testing: live trading on a demo account.
It will take at least two months to trade live with the new system on a demo account.
This will give you a feel for how to trade with your system as the market moves. Believe me, trading live is completely different compared to backtesting.
If you still achieve good performance, then you can use the system to trade in real time on a live account.
At this time, you will feel very confident in your foreign exchange trading system, and you will be very firm when trading without hesitation.
Create Your Trading System in 3 Steps
Now that you understand the basics of technical analysis, let's put all the information together and create a simple trading system.
This will let you know what you are looking for when creating your own forex trading system.
This system is a moving average crossover system that uses moving averages to determine whether to go long or short. There are many more technical indicators that are used to confirm long or short positions before entering the market.
You will learn to use these technical indicators to determine very clear entry and exit levels
3 simple steps to create a trading system:
1. Determine the time frame
2. Determine the entry trigger
3. Determine the exit trigger
Trade set
at Trading on the daily chart (swing trading)
5-day simple moving average applied to closing price
10-day simple moving
average applied to closing price Stochastic (14, 3, 3)
Relative Strength Index (9)
Trading Rules
Entry The rule
is to go long when the following conditions are met:
The 5-day SMA crosses the 10-day SMA up and both Stochastic lines are up (do not enter if the Stochastic lines are already in overbought territory) Relative
strength When the index is greater than 50,
go short when the following conditions are met:
The 5-day simple moving average crosses the 10-day simple moving average downward, and both stochastic lines are down (if the stochastic line is already in the oversold area, do not enter)
RSI < 50
Exit Rule
When the 5-day SMA crosses the 10-day SMA in the opposite direction from what you expected, or the RSI returns to 50
When the trade hits the 100 pip stop
If the daily charts are moving too slowly for you, try a different time frame.
Remember, the lower the time frame, the higher the chance of false signal trades. These trades satisfy the entry rules, but end up getting you stopped out. Remember: only followed trading systems work!
You need to be disciplined and follow the rules!
Alright, let's look at some charts,
"Super Simple" Trading System
As you can see, we already have all the components needed for a good forex trading system.
First, we have established that this is a swing trading system and will be trading on the daily chart.
Next, we use simple moving averages to identify trends as early as possible.
Stochastics help us determine if moving average crossovers are appropriate for entry and also help us avoid overbought and oversold areas. The Relative Strength Index is an additional confirmation tool that helps us confirm the strength of a trend.
After determining our trade settings, we determine the risk of each trade. In this system, we are willing to risk 100 pips on each trade.
Generally speaking, the higher the time frame, the more risk you are willing to take, as the profits will be greater on higher time frames relative to lower time frames.
Next, we determined entry and exit rules. At this point, we will begin the testing phase, starting with manual backtesting.
Trade Example: Buying EURUSD
Here is an example of a long trade setup:
If we go back and look at this chart, we will see that according to the rules of our system, this is a good time to go long.
In order to backtest, you need to write down what level you are willing to enter, your stop loss and exit strategy.
After that, you move the chart one bar at a time to see how the trade unfolds.
In this example, you made a nice profit! After this deal, you can treat yourself by shopping.
You can see that when the moving averages cross in the opposite direction, it is a good time for us to get out. Of course, not all deals are so attractive. Some trades may look bad, but you should always remember to be disciplined and stick to the rules of your trading system.
Here is an example of an empty order entry.
We can see that the criteria have been met: moving averages crossed, Stochastic is showing downward momentum and is not in oversold territory, RSI is below 50.
At this time, we can enter the market with an empty order.
Now, we record entry levels, stop losses, exit strategies, and then move the chart forward one bar at a time to see what happens.
The trend turned out to be quite strong, with the pair dropping almost 800 pips before forming another cross!
Very simple, right?
We know that you may think this system is too simple to be profitable. But it's actually very simple, and you shouldn't be afraid of simple things. In the trading world, you will often see an acronym: KISS.
Rep: Keep it simple! (r Keep It Simple Stupid)
This means that the foreign exchange trading system does not need to be complicated.
You don't need to add countless indicators on the chart, it's actually too complicated to give you a headache.
The most important thing is discipline. This cannot be emphasized enough.
You must always adhere to your own trading system rules!
If you should backtest your forex trading system and live trade on a demo account for at least 2 months.
Then you will feel that as long as you follow the rules, you will achieve long-term profitability.
Trust your system, trust yourself!
Conclusion
There are many systems that work very well, but many forex traders lack discipline, do not follow the rules, and end up losing money as a result.
Your mechanical trading system should achieve two goals:
1. Be able to identify trends early
2. Be able to find ways to avoid zigzags (confirm trends)
If the system is profitable, then at least use your forex trading system on a demo account 2 months of live trading.
This will help you understand how to trade systematically when the market moves. Live trading is very different compared to manual backtesting.
Once you have systematically traded on a demo account for at least 2 months and are profitable, then you are ready to trade systematically with real money.
However, you must always remember to follow the rules no matter what!
6 steps to create a mechanical forex trading system:
1. Find the time frame
2. Find indicators that help identify trends in advance.
3. Find indicators that help avoid sawtooth fluctuations and confirm trends.
4. Determine the risk
5. Determine the entry and exit points
6. Write down your foreign exchange trading system rules and follow them all the time!
3 phases of testing the system:
Phase 1: go back in time and move the chart forward one candle at a time.
Conduct systematic transactions according to the rules, record your transactions, and check whether they are finally profitable. This is backtesting.
The second stage: if the system is profitable, conduct real-time system trading on the demo account for at least 2 months.
This will help you understand how to trade with your system when the market is moving, manual backtesting is very different from live trading.
Stage 3: Once you have been trading on a demo account for at least 2 months and are profitable, you are ready to trade systematically with real money.
However, always remember to follow the rules no matter what!
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