Creating a Forex Trading System: Indicator Based Forex System - MetaTrader 4 Template Forex Trading System
A Forex System refers to a set of forex trading rules that you follow to manage your trades. These written forex trading rules will determine when you open a trade and when you will exit. A 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 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 - MetaTrader 4 Template Forex Trading System Example
Creating a Forex System - Forex System Trading Example
So the question is how can a 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 system
To come up with these set of forex trading rules we use the following seven steps.
1. Choose your 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.
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.
2. Choose indicators to identify a new forex 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 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 trend
To confirm the forex trading signals we use RSI indicator and Stochastic Oscillator indicator.
RSI Indicator and Stochastic Oscillator Indicator Forex 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 trading signal, it is time to enter a forex trade.
A Forex trader should enter a trade as soon as a forex trading signal is generated and confirmed after a candlestick closes.
Aggressive traders enter a forex trading 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 forex signal remains valid. 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 trader can either set an amount he wants to earn per trade or use technical forex tools that help to set profit goals like Fibonacci expansion tool or set a protective stop loss depending on the market volatility at any given time. Alternatively a trade can exit when the indicators give an opposite trading signal.
When opening a new trade transaction it is always important to calculate in advance how much you are willing to lose if the 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 trade transaction is very important.
5. Calculate risks in each trade setup
In Forex, you must calculate your risk for each forex trade. Serious traders will only enter and look to open an order if the risk to reward ratio is 2:1 or more.
If you use a high risk to reward ratio like 2:1, you significantly increase your chances of becoming profitable in the long run.
The Reward to Risk Chart below shows you how:
Money Management Reward Risk Chart - Example Template Forex Trading System
In the first example of Risk to Reward Ratio, you can see that even if your forex trading system only won 50% of your trades, you would still make a profit of $10,000. Read more on this money management forex topic: Here Forex Money Management Rules - MetaTrader 4 Template Forex Trading System and Forex Money Management Methods - Template Forex Trading System Example.
Before opening a new forex trade, a trader should define the point at which they will close the trade if it turns to be a losing forex 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 forex systems forex trading rules and follow them
A Forex Trade System refers to a set of rules that you follow to manage your trades.
The keyword is A SET OF TRADING RULES which you must follow. If you don't follow the trading rules then you don't even have a 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:
7. Practice on a Demo Account
Without enough trades, you will not be able to realize the true profitability of your Forex system.
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 demo account and practice for at least for 1 or 2 months so as to gain some practice and experience how the currency market works.
Once you start making some decent profit on your demo account you can then try opening a live Forex trading account and start trading with real money.