A forex trading system is a manual or automated tool that helps to improve your results. Most traders have such systems in place that help them to identify entry and exit zones.
Similarly, most investment and proprietary trading companies have their own in-built trading systems that ensure their continuity and profitability. In this article, we will look at how you can create a good and profitable forex system.
Types of forex trading systems
There are two primary types of systems:
- Manual system. This is a system that will show you signals on popular currency pairs — and then you enter the trades manually. This system can be in the form of software or a set of written rules that must be followed to implement trades.
- Automated trading system. This is a system that identifies key combinations and places the trades automatically. It can also be created to send signals when some criteria are met. Such a system is also known as an expert advisor, bot, or robot.
Creating a system is often a long process that takes a substantial amount of time to design and back-test. However, when created, the process can save you a lot of time, boost your confidence, and enable you to profit consistently.
For an automated system, you need to have substantial experience in trading and in software development. The latter skill is necessary because you will need to translate technical indicators into a working robot.
In all these, the system will be influenced by the factors below.
Type of trader you are
When creating a system, you need to determine what the type of forex trader you are. This is important because your overall strategy will influence the system you create.
Scalping is an approach that requires opening and closing several trades within hours, minutes, or even seconds. The approach allows you to capture small price changes numerous times a day.
In swing trading, your goal is to follow some medium-term trends. As a swing trader, you may open several trades per week and hold them for a few days.
Further, there is a long-term trading strategy, where you open a few trades within several months.
Each of these strategies will require a different type of trading system.
For example, if you use a system that combines several moving averages, a swing trader will employ shorter periods like 14-days and 7-days.
On the other hand, a longer-term trader will use longer moving averages like 50-day and 100-day.
Therefore, if you are a new trader, you should first consider the overall strategy that you prefer. If, on the other hand, you are an experienced trader, you should create a system based on your tried and tested trading strategies.
Find your preferred indicators
A trading system will require you to narrow down the vast amount of indicators to just a few. Since there are hundreds of indicators, you need to select a handful of them that work. This is important because using tens of indicators to analyze a single currency pair will typically lead to errors.
Therefore, if you are a new trader, you should work hard to find indicators that work well based on your preferred strategy. If, on the other hand, you are an experienced trader, you should select the indicators that have worked well for you over the years.
Some of the most popular technical indicators useful in trading systems are exponential moving averages (EMA), Ichimoku Kinko Hyo, Market Facilitation Index (MFI), and the standard deviation.
In my experience, traders who create systems based on about 3 or 4 indicators do better than those who use 5-10 indicators.
Calculate your risk preference
Day trading, whether doing it manually or automatically, is a risky business. Therefore, you should pay close attention to risk assessment when creating a system.
There are a variety of ways of approaching this. The most popular is to set certain rules that your system will follow. Some of these preferences are:
- Trade sizes – You should set the maximum and minimum trade sizes that you want to use. A big trade size will typically lead to a bigger profit and vice versa. Therefore, take time to assess your most profitable trade sizes.
- Leverage – This refers to the amount of money that your broker lends you to trade. Bigger leverage will lead to a bigger profit and a more significant loss.
- Risk-reward ratio – Work to find a good risk-reward ratio that will work for your trading system.
Compile the trading system
After doing all this, you should now compile the trading system. If it is a manual or written system, write down these rules on a piece of paper or a digital platform.
On the other hand, if it is an automated system, take your time to codify it into software or a bot. Depending on your experience, this process should take a few hours or days.
Test the system
The final stage when you are developing a trading system is to test it in the market. For an automated trading system, you should use the strategy tester tools provided by most trading platforms to do it. Using historical data to test a manual system is a relatively difficult process.
In the next step, you should use live data in a demo account to test the system. There is no agreed period for doing this, but it should take you a minimum of two months. This will help you to see how the system will work when you use it in a live account. It will also help you identify gaps in your system.
A manual and automated trading system is a vital thing to have as a day trader. It will give you a good structure for trading the Forex market. It will also help you minimize the noise in the market and become a better professional.