Trade Forex Trading

Developing a System: Indicator Based Strategy

A forex system is a group of rules for handling trades. They guide when to enter and exit. Build a strategy by mixing two or more indicators.

For instance, the Stochastic Indicator can be effectively integrated with various other indicators to create a trading strategy. In this case, the Stochastic Oscillator may be paired with the following indicators to develop a comprehensive trading system.

  • RSI indicator
  • MACD indicator
  • Moving Averages indicators

Example System - MT4 Template System Example

Developing System Template - MetaTrader 4 Strategy Template

Creating a Strategy Example Template

So, how do you make plans that work like the trading system example above, and how do you write down its trading rules? To write down the system's trading rules, follow the steps I'll explain below.

Seven steps to creating a indicator based system

To create these set of rules we make use of the following 7 guidelines.

1. Choose and Select your Timeframe

Your first step in forex trading rests on how many hours you plan to commit. Do you want to stay at your desktop computer for hours, studying short-term charts? Or do you set up bigger time frame charts once or twice each day? The time frame you pick comes down to your style as a trader.

Chart Time Frame Button in MT4 - Template for MetaTrader 4 Forex Strategies

Chart Time Frames in MT4 Platform

While testing your new trading system you may want to find out about its performance on different chart time frames and then select the most accurate and profitable chart time frame for you & your method.

2. Choose technical indicators to identify a new market trend

The goal of a trader is to get into the trade as early as possible and take maximum advantage of price moves.

One of the most common ways to identify a new market trend as fast as possible is to use MAs Indicator. A simple trade system is to use a Moving Average(MA) crossover trading strategy which will identify a new trading opportunity at its earliest stage.

MA Cross over Method

Buy and Sell Signals from Moving Average Crossover - Example of Strategy Creation

Purchase and Sale Signals Generated and Derived Via the Moving Average Crossover Trading Methodology

3. Select and Choose additional technical indicators to confirm the trend

Once a new market trend is identified, it is essential to employ additional indicators that will validate the entry forex trading signals, providing either a green light for action or protecting a forex trader from potential fake-outs.

To confirm the trading signals we use RSI and Stochastic Oscillator Technical indicator.

Technical Trading Strategy Template for RSI and Stochastic Oscillator

RSI and Stochastic Indicator Technical Strategy

4. Finding entry and exit points

Once indicators are chosen so that one indicator gives the trading signal and another indicator confirms the signal, it's time to enter a trade.

One should enter a trade as soon as a trading signal is derived & generated and confirmed after a candle closes.

Traders with an aggressive approach enter positions immediately, without waiting for the current bar to close.

Some traders wait for the current candlestick to close before making a trade. They will enter the trade only if the setup hasn't changed and the signal is still good after the candlestick closes. This method is more careful and helps avoid false entries and sudden price movements that can mislead traders.

Generating Signals - how to Generate Signals.

MT4 Strategy Templates for Signals - Build Trading Strategy Example

Generating Signals

For exits, one can either set an amount that they want to earn per trade or use technical tools that help to set profit target goals like Fib expansion tool or set a protective stop loss depending on the market price volatility at any one given time. Alternatively a trader can exit when the indicators give a signal in the opposite market trend signal.

When opening a new trade position it's always important to calculate in advance how much you're willing to lose if the trade transaction moves against you. Although the goal is to create the best system in world, losses are inevitable & hence being ready to tell where you will give up & cut your losses before beginning a trade transaction is very important.

5. Calculate risks in each trading setup

In Forex, you as a FX trader must calculate your risk for each trade transaction. Serious traders will only enter and look to open/execute an order if the risk reward ratio is 3:1 or more.

If you go for a high risk-to-reward ratio like 3:1, you really improve your chances of turning a profit over time.

The Risk to Reward Chart below shows to you how:

Risk Reward in Money Management: Ratio Chart PDF

Money Management Risk:Reward Chart - An Explanation of Risk:Reward Ratios in Money Management Techniques

In the first risk-reward ratio examples, a forex trader sees this: Even with 50% wins, you can still make $10,000 profit. Learn more about money management here: Capital Management Guidelines and Equity Management Guidelines Discussed.

Before starting a forex trade, set your exit if it goes wrong. Some use Fibonacci retracements or support and resistance lines. Others place a fixed stop loss right after entry.

6. Write down the systems trading rules and follow them

A Trading Strategy constitutes a defined set of protocols that a trader adheres to for managing their market positions.

The main point is HAVING TRADE RULES that you, as someone who trades, must use. If you do not use the rules, then you do not have a plan.

The next part shows you how you can use the steps above to set up your own online trading system:

Next guide: Examples of trade system rules.

7. Practice on a Demo Practice Trading Account

You Need Enough Trades to See Your Trading System's Real Profit Potential

Once you've written your forex system rules, start testing and improving your trading system with a practice account.

Initiate trading using a complimentary demonstration ledger to empirically test the efficacy and responsiveness of your established trading approach.

It is strongly recommended to start with a practice account & practice for at least for one or two months so as to garner some practice and experience on how the market works.

Build profits in a demo account first. Then switch to a live account with real cash.

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