Creating a Forex Trading System: Indicator Based Forex Trading System
A Forex System refers to a set of forex trading rules that you follow to manage your forex trades. These written forex trading rules will determine when you open a forex trade and when you will exit a forex trade. A forex trade system is created by combining two or more forex technical indicators.
For example, the Stochastic Oscillator indicator can be combined with other forex indicators to form a forex trading system. For this example - stochastic oscillator can be combined with the forex technical indicators below to come up with the following forex trading system.
- RSI indicator
- MACD indicator
- Moving Averages indicators
Example Forex Trading System - MetaTrader 4 Template Forex Trading System Example
Creating a Forex System Example - Forex System Trading Example
So the question is how can a forex trader come up with Forex trading systems that work like the forex trading system example above and how does one write it's forex trading rules? - to write the forex trading system trading rules follow the steps below.
Seven steps to creating an indicator based Forex trading system
To come up with these set of forex trading rules we use the following seven steps.
1. Choose your Forex Trading Chart Time Frame
This first step depends on how many hours you want to dedicate to forex trading. Whether you prefer sitting in front of the computer constantly for several hours analyzing short forex chart time frames OR you prefer setting up your forex trading charts using bigger forex chart time frames once or twice a day. Choosing a forex chart time frame will mainly depend on what type of forex trader you are.
Forex Trading Chart Time Frames on MetaTrader 4 Forex Trading Software
While testing your new Forex trading system you may want to find out about its performance on different forex chart time frames and then choose the most accurate and profitable forex chart time frame for you and your forex trading method.
2. Choose indicators to identify a new forex trend
The goal of a forex trader is to get into the trade as early as possible and take maximum advantage of forex price moves.
One of the common ways to spot a new Forex trend as fast as possible is to use Moving Averages Indicator. A simple forex strategy is to use a moving average crossover system that will identify a new trading opportunity at its earliest stage.
Moving Average Crossover Method
Sell forex trading signal and Buy forex trading signal Generated by Moving Average Crossover Trading Method
3. Choose additional forex indicators to confirm the forex trend
Once we find a new forex trend we need to use additional forex indicators that will confirm the entry forex trading signals and give either a green light for action or save a forex trader from fake-outs.
To confirm the forex trading signals we use RSI forex indicator and Stochastic Oscillator forex indicator.
RSI Indicator and Stochastic Oscillator Indicator Forex Trading System
4. Finding forex entry and forex exit points
Once forex technical indicators are chosen so that one forex indicator gives the trading signal and another indicator confirms the forex trading signal, it is time to enter a forex trade.
A Forex trader should enter a forex trade as soon as a forex trading signal is generated and confirmed after a forex candlestick closes.
Aggressive forex traders enter a forex trading transaction immediately without waiting for the current price bar to close.
Other forex traders wait until the current price bar is closed and then enter the forex trade transaction if the trade setup has not changed and the forex signal remains valid after the price bar has closed. This method is more considerate and prevents additional false entries and forex whipsaws.
Generating Forex Signals - how to Generate Forex Trading Signals.
Generating Forex Trade Signals
For exits, a forex trader can either set an amount he wants to earn per trade or use technical forex tools that help to set profit target goals like Fibonacci expansion tool or set a protective stop loss depending on the market volatility at any given time. Alternatively a forex trade can exit when the forex indicators give an opposite forex trading signal.
When opening a new forex trade transaction it is always important to calculate in advance how much you are willing to lose if the forex trade transaction goes against you. Although the goal is to create the best Forex trading system in the world, losses are inevitable and therefore being ready to tell where you will give up and cut your losses before starting a forex trade transaction is very important.
5. Calculate risks in each forex trade setup
In Forex, you must calculate your risk for each forex trade. Serious forex traders will only enter and look to open an order if the risk to reward ratio is 3:1 or more.
If you use a high risk to 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 Reward Risk Chart - Money Management Methods Risk : Reward Ratio Explained
In the first example of Risk to Reward Ratio, you can see that even if your forex trading system only won 50% of your forex trades, you would still make a profit of $10,000. Read more on this money management forex topic: Here Forex Money Management Rules and .
Before opening a new forex trade, a forex trader should define the point at which they will close the forex trade if it turns to be a losing forex trade. Some forex traders use Fibonacci retracement levels tool and support and resistance levels. Other forex traders just use a pre-determined stop loss to set stop loss orders once they have opened a forex trade transaction.
6. Write down the forex systems forex trading rules and follow them
A Forex Trade System refers to a set of trading rules that you follow to manage your forex trades.
The keyword is A SET OF TRADING RULES which you must follow. If you don't follow the forex trading rules then you don't even have a forex trading system in the first place.
The next Forex trading systems lesson shows you an example of how to use the above steps to come up with your own forex online trading system:
Next Lesson: Example of Writing Forex Trade Systems Rules
7. Practice on a Forex Demo Account
Without enough trades, you will not be able to realize the true profitability of your Forex trading system.
Once you have your Forex trading system rules written, it is time to test and improve your forex trade system by using it on a forex demo practice account.
Open a free demo practice account and trade your forex system to see how well it will respond.
It is strongly recommended to start with a forex demo account and practice for at least for 1 or 2 months so as to gain some practice and experience on how the forex trading market works.
Once you start making some decent profit on your forex demo account you can then try opening a live forex trading account and start trading with real money.