Developing a System: Indicator Based Strategy
A Forex System refers to a set of rules that you follow to manage your trade positions. These written trading rules will determine when you open a trade and when you'll exit a trade. A trading strategy is developed by combining 2 or more indicators.
For example illustration, the Stochastics Indicator can be combined with other indicators to form a trading strategy. For this illustration - stochastics oscillator can be combined with the indicators below to come up with the following trading system.
- RSI indicator
- MACD indicator
- Moving Averages indicators
Example System - MT4 Template System Example
Creating a Strategy Example Template
So the question is how can one create strategies that work like the trading system example above and how does one writedown it's trading rules? - to write the system trading rules follow the steps explained 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
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 charts using larger 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 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
Sell signal and Buy signal Derived and Generated by MA Cross-over Trading Method
3. Select and Choose additional technical indicators to confirm the trend
Once we find a new market trend we need to use additional 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 and Stochastic Oscillator Technical indicator.
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.
Aggressive traders enter a trade transaction immediately without waiting for the current bar to close.
Other traders wait until the present price candlestick is closed & then enter the trade transaction if the trade transaction setup has not changed and the signal remains valid after the price bar has closed. This technique is more considerate and prevents additional false entries & fakeout whipsaws.
Generating Signals - how to Generate Signals.
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 use a high risk : reward ratio like 3:1, you significantly improve your chances of becoming profitable in the long run.
The Risk to Reward Chart below shows to you how:
Money Management Risk:Reward Chart - Money Management Methods Risk : Reward Ratio Explained
In the first examples of Risk-:-Reward Ratio, you as a forex trader can see that even if your system only won 50% of your trade positions, you'd still earn profit of $10,000. Read more on this money management topic: Here Capital Management Guidelines and Equity Management Guidelines Discussed.
Before opening a new trade, a fx trader should define the point at which they will close-out the trade transaction if the trade transaction turns to be a losing trade. Some traders use Fib retracement levels tool and support and resistance levels. Other traders just use a pre-determined stop loss order to set stoploss orders once they have opened a trade transaction.
6. Write down the systems trading rules and follow them
A Trade Strategy refers to a set of rules which you follow to manage your trades.
The keyword is A SET OF TRADE RULES that you as a trader must follow. If you don't follow the rules then you do not even have a strategy 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 Lesson: Example illustration of Writing Trading Systems Rules
7. Practice on a Demo Practice Trading Account
Without enough trades, you'll 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 free practice demo account and trade your trading strategy to see how well it will respond.
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.
Once you start earning some decent profit in your demo account you then can try opening a live account & start trading with real/live money.
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