Writing a Rule Based Strategy

A trading system is a set of trading rules that specify when to open and when to close trade positions. To come up with a complete system a trader is also required to follow advanced trading rules that will guide his trading method. These rules are also part of the trading system but cover a wider approach of how a trader uses their system when opening & closing trade positions.

Following things will also be included within the forex system that a trader will come up so as to make the system of a trader complete.

Mindset/Forex Psychology

This section of the trader's forex system will write down the mindset that a trader will follow when setting their trades using their trade system/strategy. Your mindset as a currency trader should specify that you will only follow the trading signals generated by your system and you'll not open trade positions just because the market has started to move up or move down. If a trade signal is not generated by your trading system then you will not open any trade on the market. The way you will make sure that you follow only your system is by using forex psychology to control your emotions in trading.

You should be prepared to be disciplined enough when trading to follow what your system is saying. You should never go against your system and base your trading decisions on what the market is doing. You should be objective when following the rules of your system. This will be a matter of training yourself to follow your trading system strategy even when you make a trade transaction that loses money you as a trader must follow your system and close the trade transaction at the specified level where your trading rules say the trade transaction should be closed to avoid further losses. Close that trade and wait for another opportunity, there'll always be another opportunity to trade tomorrow, next week or next month you do not have to stay on 1 trade until you lose all you trading funds & after you miss the other trading opportunities that you would have had.

You will also have to figure out the best trading style method for your personality so that you're comfortable with the types of trade that you place in the market. For example if you as a trader can execute trade positions quickly then you may select to be a scalper, if on the other hand you are the type of trader that likes to take time before making a decision then scalping may not be the best trading method for you, instead you should become a day trader or a swing trader and that way you as a trader can have enough time between trades to make a decision. By selecting a trade style that most fits your personality is the first thing you should do and after you've made the correct choice of the method that most fits you then you'll have the right mindset when trading & you'll increase your chances of being more successful when trading the currency market.

Set Goals To Follow When Trading

You have to know what trading goal you want to achieve when it comes to & executing trade positions with your system. Your goal might be that you want to follow your system all the time and never take any trade that is not indicated by your system. Another goal might be that you want to be more disciplined when executing trade transactions by being patient and disciplined enough to wait for a signal to be derived & generated by your system before opening a trade and that you will not jump the gun and open a trade position before the signal is generated. Sometimes a trader may see that a signal is about to be derived & generated by their strategy but it has not been generated according to the rules of the trading system but a trader may decide to open a trade transaction before the signal and wait for the signal while they are in the market, this shouldn't be how a forex trader should trade, traders should learn to be patient and disciplined enough to wait for the signal to be derived and generated before opening a trade position.

Select The Most Liquid Currency Pairs To Trade

Traders should also specify the currency pairs that they will be trading with their system. A trader may come up with a system which has got a strategy that is best fitted for trading some currency pairs only. The trader should therefore only trade with their trade system strategy when they are trading only these currencies. This is because the trading system may not produce the same profitable results when applied to other currencies like the currency pairs known as exotic currency pairs.

Most systems will produce best results when they are applied to trading the most liquid currency pairs & hence a forex trader should make sure that they only trade those currency pairs that are best fitted for their strategy. This is why traders should specify in their rules the currency pairs that they will be trading.

Capital Management Guidelines

For a system to be very successful then a forex trader should make sure that they also specify the money management guidelines that they'll always follow when trading the currency exchange market.

The equity money management strategy that a forex trader uses should have a high risk : reward ratio so that to give the trader more chances at becoming profitable when trading with their trading strategy.

The equity management should specify at what level a forex trader will close-out a losing position: the trader should also make sure that they close all their losing trade positions at this point.

A trader should also never risk more than 2% of their equity on any 1 single trade transaction.

The trader should also determine where they will always take profit order when their trade is profitable. The takeprofit level should be 2 times the stop loss level. For example is a forex trader is setting their stops at 25 pips then the traders should set their take-profits at 50 pips. This is what is referred to as a high risk reward ratio to trade with. This risk:reward ratio is 2:1, which means a forex trader can make 2 times profit the amount which they set as their loss. This way by using a high risk:reward ratio means that a forex trader will be more successful in the long-run because their method uses a high risk : reward ratio that means that they stand to make two times the amount that they set as their loss.

Keep a Journal

Traders should always keep a journal & this journal will prove to be a very helpful trading tool when it comes to improving their system.

For example when a trader is designing their system & they want to test it out on the forex market, then the forex journal will prove to be a very helpful tool to help them do this. This because while testing out the system traders will record all their trades on this trading journal and after a while they can use this trading journal to review their trades, traders can find out why the losing trade positions made losses & determine what factors & aspects in their trading strategies are resulting in generating trade signals which accrue losses, the trader will then try to not make the same mistake while trading in the future. A trader also will try and find the patterns which help them to earn profitable trade positions & the traders can then use these pattern setups to trade with in the future so that as they can improve the profitability of their trade system strategy in the future and there help them to become more successful.

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