How to design a Forex Trading System?
In this article
After becoming familiar with the forex market, a thought that probably pops in your head is, “How can I design my own forex trading system”?
But how would you do that? Surely, you are not thinking about designing a forex trading system by sauntering iron in your backyard!
What you need to do is to follow these simple steps, which we’ll explain in this guide, and voila!
So, let’s get started.
1. Determine your trading time
When developing your system, the first thing you must determine is what kind of forex trader you are.
Are you a swing or day trader?
Do you enjoy looking at charts on a regular, weekly, monthly, or even yearly basis? How long do you want to open your positions?
This will help you decide which time period to trade.
Even though you will explore several time frames, this will be the main time frame you will use when looking for entry and exit points.
There is no hard and fast rule, and there is no good or bad timeframe. It all depends on how please you are with the one you want and how much time you have to devote to trading. Avoid selecting a timeframe solely because it is used by other traders. The trading system should be tailored to your specific needs.
You should also decide which currencies you want to trade and the trading hours – particularly if you want to trade intraday. Again, the currencies you will trade and the hours you will trade should be compatible with your trading style as well as your trading system.
2. Pick up your tools
Trading tools can assist you in identifying trading opportunities and making informed trading decisions. As a result, the trading methods you choose should be those with which you are most familiar.
In general, many traders prefer to use Price Action and candlestick patterns. Others prefer to use forex indicators to validate movements after they have been detected or to enter and exit trades. For maximum advantage, many traders employ a blend of these tools.
When working with forex indicators, you need to set two main goals:
- Identify trends as soon as possible. Moving averages are one of the most popular indicators used by traders to identify trends. Of course, there are many other ways for forex traders to detect a trend, but moving averages are one of the simplest.
- Your second target is to stop whipsaws, which means you don’t to be caught in a false trend.
This is achieved by knowing that we can validate it with other indicators when we see a signal for a new pattern.
Many technical indicators, such as MACD, Stochastic, and RSI, are useful for confirming patterns.
3. Define your risk
It is essential to determine how much you are willing to risk on each trade when building your forex trading system.
Many people dislike talking about losing; however, a successful trader considers what he or she might possibly lose before considering how much he or she might win.
Your willingness to risk money would be different from everyone else’s.
You must decide how much space is sufficient to give your trade some breathing room while not putting too much money at risk on a single trade.
4. Finding entry and exit points
This is the stage in which you decide when to enter and when to leave each trade.
Typically, trades are entered when the indicators or Price Action indicate a successful entry point.
The more cautious approach is to enter after the signal candle has closed.
If you like to keep it aggressive, you may choose to enter before the candle closes. However, this approach tends to be riskier since the market doesn’t always command your wishes, jeopardizing your entry position.
For exits, you need to follow different options:
- One method is to trail your stop, which means that if the price moves in your favour by a certain amount, you move your stop by the same amount.
- Another way to exit is to set a price target and exit when the price reaches that level. It is up to you how you determine your goal. Some traders, for example, set support and resistance levels as their targets.
5. Jot it down
This is the most important step in designing your trading system. You must write down your trading system rules and always stick to them.
Discipline and patience are two of the most essential qualities a trader must possess, so remember to stick to your system!
Remember that no system will ever work for you if you do not follow the rules.
6. Test your trading system
After you have done all the hard yards, the final step is to put your trading system through its paces over a certain number of trades and time periods. If your trading system can be automated, you can backtest it using a strategy tester.
Otherwise, you can go through historical data and manually record potential trade entries, exits, and possible outcomes.
If you think everything is fine, you can open a demo account to engage in live virtual trading. This will help you understand how to trade your system while the market is moving. Trust us when we say that trading in real-time is not the same as backtesting.
After two months of trading on a demo account, you will be able to determine if your system can really stand its ground in the market.
If you are getting consistent results, then you can test your system on a real account.
You can build your forex trading system by fusing psychology, fundamentals, a trading methodology, and risk management.
If you get knocked out on your first attempt, don’t fret. Often traders make a successful trading system on their second try.
Remember, “The second mouse gets the cheese.”
Also, have realistic expectations from your trading system. Don’t expect to turn $100to $10,000 in ten trades. You have to learn the art of discipline and patience in trading.
Jason Morgan is an experienced forex analyst and writer with a deep understanding of the financial markets. With over 13+ years of industry experience, he has honed his skills in analyzing and forecasting currency movements, providing valuable insights to traders and investors.
Forex Content Writer | Market Analyst