Trade Forex Trading

Developing a Trading System: Indicator Based Strategy

A Forex System refers to a set of rules that you follow to manage your trade transactions. These written trading rules will determine when you open a trade and when you will exit a trade. A trade system is developed by combining two or more technical indicators.

For example, the Stochastic Oscillator Technical Indicator Trading Indicator indicator can be combined with other technical indicators to form a tradingtrade system. For this example - stochastic oscillator can be combined with the indicators below to come up with the following trading system.

  • RSI indicator
  • MACD indicator
  • MAs trading indicators

Example System - MT4 Template Trading System Example

Creating Trading System Template - MT4 Forex Strategy Template

Creating a System Example Template

So the question is how can a trader come up with systems that work like the trading system example above and how does one write it's trading rules? - to write the system trading rules follow the steps below.

Seven steps to creating a technical indicator based system

To come up with these set of rules we use the following seven steps.

1. Choose your Timeframe

The first step depends on the number of hours you want to dedicate to forex trading. Whether you prefer sitting in front of the Desktop computer throughout for several hours analyzing short chart time-frames OR you prefer setting up your trading charts using bigger chart time frame once or twice in a day. Choosing a chart time-frame will mainly depend on what type of trader you're.

Chart Timeframes Button on MT4 - MT4 Forex Strategies Template

Chart Time Frames in MetaTrader 4 Software

While testing your new trading system you might want to find out about its performance on different chart timeframes & then choose the most accurate & profitable chart time frame for you and your trading 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 common ways to spot a new market trend as fast as possible is to use MAs Indicator. A simple trade system is to use a Moving Average cross-over trading strategy that will identify a new trading opportunity at its earliest stage.

MA Cross over Technique

Sell Signal and Buy signal Generated by Moving Average Crossover Strategy Method - Example of How Do I Create Strategy?

Sell signal and Buy signal Generated by MA Cross-over Trading Method

3. Select additional indicators to confirm the market trend

Once we find a new market trend we need to use additional trading indicators that will confirm the entry forex trading signals & give either a green light for action or save a fx trader from fake-outs.

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

RSI Indicator and Stochastic Oscillator Technical Trading System Template Example

RSI Indicator and Stochastic Oscillator Technical Trading 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 is time to enter a trade.

A trader should enter a trade as soon as a trading signal is generated & confirmed after a candlestick closes.

Aggressive traders enter a trade transaction immediately without waiting for the current price bar to close.

Other traders wait until the current price bar is closed and then enter the trade transaction if the trade setup has not changed and the signal remains valid after the price bar has closed. This method is more considerate and prevents additional false entries and fakeout whipsaws.

Generating Signals - how to Generate Trading Signals.

Trading System Generating Signals - MT4 Forex Strategy Templates - Example of How Do You Create Strategy?

Generating Trade Signals

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

When opening a new trade transaction it's always important to calculate in advance how much you are willing to lose if the trade goes 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 must calculate your risk for each trade transaction. Serious traders will only enter & look to open an order if the risk reward ratio is 3:1 or more.

If you use a high risk : reward ratio like 3:1, you significantly increase your chances of becoming profitable in the long run.

The Risk to Reward Chart below shows you how:

Money Management Risk Reward Chart - Money Management Methods Risk:Reward Ratio PDF

Money Management Reward Risk Chart - Money Management Methods Risk : Reward Ratio Explained

In the first examples of Risk-:-Reward Ratio, you can see that even if your trading system only won 50% of your trades, you would still make profit of $10,000. Read more on this money management topic: Here Capital Management Rules and Equity Management Rules Discussed.

Before opening a new trade, a fx trader should define the point at which they will close the trade if the trade turns to be a losing trade. Some traders use Fibonacci retracement levels tool and support and resistance levels. Other traders just use a pre-determined stop loss to set stop loss orders once they have opened a trade transaction.

6. Write down the systems trading rules & follow them

A Trade System refers to a set of rules that you follow to manage your trades.

The keyword is A SET OF TRADING RULES that you must follow. If you don't follow the rules then you don't even have a trading system in the first place.

The next systems lesson portrays to you an example of how to utilize the above steps to create your own online trading system:

Next Guide: Example of Writing Trade Systems Rules

7. Practice on a Demo Trading Account

Without enough trades, you will not be able to realize the true profitability of your trading system.

Once you have your Forex system rules written, it's time to test & improve your trade system by using it on a practice trade account.

Open a free practice trading account & trade your system to see how well it will respond.

It is strongly recommended to start with a practice account and practice for at least for 1 or 2 months so as to gain some practice and experience on how the market works.

Once you start making some decent profit on your demo account you then can try opening a live account & begin trading with real money.

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