Create Your Own Trading System
Sunday 14 November 2010
Let’s get into my favorite part of trading... creating my own trading system!
Whilst it is critical to have the right trading mindset and risk management, at the end of the day, you still need to develop a simple forex trading system, or a simple trading strategy for forex, CFD or whatever product you are trading. For short term trading of this nature, primarily this is using technical analysis.
You only need to master one trading setup to be a consistently profitable trader. Screen time (in other words, watching the screen and prices move) will allow you to master one setup and after this, you can perhaps add another setup to your repertoire. This can be an ongoing process developing your own style.
In this section we'll you a rough picture of what a trading system should look like. This should give you an idea of what you should be looking for when you develop your system.
Trading Setup
The "So Easy it's Ridiculous" System
As you can see, we have all the components of a good trading system.
First, we've decided that this is a swing trading system, and that we will trade on a daily chart. Next, we use moving averages to help us identify a new trend as early as possible.
The Stochastic help us determine if it's still ok for us to enter a trade after a moving average crossover, and it also helps us avoid oversold and overbought areas. The RSI is an extra confirmation tool that helps us determine the strength of our trend.
After figuring out our trade setup, we then determined our risk for each trade. For this system, we are willing to risk 100 pips on each trade. Usually, the higher the time frame, the more pips you should be willing to risk because your gains will typically be larger than if you were to trade on a smaller time frame.
Next, we clearly defined our entry and exit rules. At this point, we would begin the testing phase by starting with manual back tests.
Here's an example of a long trade setup:
If we went back in time and looked at this chart, we would see that according to our system rules, this would be a good time to go long.
To backtest, you would write down at what price you would've entered, your stop loss, and your exit strategy. Then you would move the chart one candle at a time to see how the trade unfolds.
In this particular case, you would've made some decent pips! You could've bought yourself something nice after this trade!
You can see that when the moving averages cross in the opposite direction, it was a good time for us to exit. Of course, not all your trades will look this sexy. Some will look like ugly heifers, but you should always remember to stay disciplined and stick to your trading system rules.
Here's an example of a short entry order for the "So Easy It's Ridiculous" system.
We can see that our criteria is met, as there was a moving average crossover, the Stochastic was showing downward momentum and not yet in oversold territory, and RSI was less than 50.
At this point we would enter short. Now we would record our entry price, our stop loss and exit strategy, and then move the chart forward one candle at a time to see what happens.
You can see that we would’ve stayed in this trade until the moving averages crossed again and RSI went back to 50.
As it turns out, the trend was pretty strong and pair dropped almost 800 pips before another crossover was made! Now isn't that ridiculously easy?
We know you're probably thinking that this system is too simple to be profitable. Well the truth is that it is simple. You shouldn't be scared of something that's simple. In fact, there is an acronym that you will often see in the trading world called KISS. It stands for Keep It Simple Stupid! It basically means that trading systems don't have to be complicated. You don't have to have a zillion indicators on your chart. In fact, keeping it simple will give you less of a headache.
The most important thing is discipline. We can't stress it enough. Well, yes we can. YOU MUST ALWAYS STICK TO YOUR TRADING SYSTEM RULES! If you have tested your system thoroughly through back testing and by trading it live on a demo for at least 2 months, then you should feel confident enough to know that as long as you follow your rules, you will end up profitable in the long run.
Trust your system and trust yourself!
Summary: Creating Your Own Trading System
There are many systems out there that work, but many traders lack the discipline to follow the rules and as a result, still end up losing money.
Your trading system should attempt to accomplish 2 goals:
Once you've demo traded your system for at least 2 months and you are still profitable, you are then ready to trade your system live with real money. However, you must always remember to stick to your rules no matter what!
There are 6 steps to developing your system:
Whilst it is critical to have the right trading mindset and risk management, at the end of the day, you still need to develop a simple forex trading system, or a simple trading strategy for forex, CFD or whatever product you are trading. For short term trading of this nature, primarily this is using technical analysis.
You only need to master one trading setup to be a consistently profitable trader. Screen time (in other words, watching the screen and prices move) will allow you to master one setup and after this, you can perhaps add another setup to your repertoire. This can be an ongoing process developing your own style.
In this section we'll you a rough picture of what a trading system should look like. This should give you an idea of what you should be looking for when you develop your system.
Trading Setup
- Trade on daily chart (swing trading)
- 5 SMA applied to the close
- 10 SMA applied to the close
- Stochastic (14,3,3)
- RSI (9)
- Entry Rules
- Enter long if:
- The 5 EMA crosses above the 10 EMA and both stochastic lines are heading up (do not enter if the stochastic lines are already in the overbought territory) .
- RSI is greater than 50 .
- Enter short if:
- The 5 EMA crosses below the 10 EMA and both stochastic lines are heading down (do not enter if the stochastic lines are already in oversold territory) .
- RSI is less than 50 .
- Enter long if:
- Exit Rules
- Exit when the 5 EMA crosses the 10 EMA in the opposite direction of your trade OR if RSI crosses back to 50 .
- Exit when trade hits stop loss of 100 pips .
The "So Easy it's Ridiculous" System
As you can see, we have all the components of a good trading system.
First, we've decided that this is a swing trading system, and that we will trade on a daily chart. Next, we use moving averages to help us identify a new trend as early as possible.
The Stochastic help us determine if it's still ok for us to enter a trade after a moving average crossover, and it also helps us avoid oversold and overbought areas. The RSI is an extra confirmation tool that helps us determine the strength of our trend.
After figuring out our trade setup, we then determined our risk for each trade. For this system, we are willing to risk 100 pips on each trade. Usually, the higher the time frame, the more pips you should be willing to risk because your gains will typically be larger than if you were to trade on a smaller time frame.
Next, we clearly defined our entry and exit rules. At this point, we would begin the testing phase by starting with manual back tests.
Here's an example of a long trade setup:
If we went back in time and looked at this chart, we would see that according to our system rules, this would be a good time to go long.
To backtest, you would write down at what price you would've entered, your stop loss, and your exit strategy. Then you would move the chart one candle at a time to see how the trade unfolds.
In this particular case, you would've made some decent pips! You could've bought yourself something nice after this trade!
You can see that when the moving averages cross in the opposite direction, it was a good time for us to exit. Of course, not all your trades will look this sexy. Some will look like ugly heifers, but you should always remember to stay disciplined and stick to your trading system rules.
Here's an example of a short entry order for the "So Easy It's Ridiculous" system.
We can see that our criteria is met, as there was a moving average crossover, the Stochastic was showing downward momentum and not yet in oversold territory, and RSI was less than 50.
At this point we would enter short. Now we would record our entry price, our stop loss and exit strategy, and then move the chart forward one candle at a time to see what happens.
You can see that we would’ve stayed in this trade until the moving averages crossed again and RSI went back to 50.
As it turns out, the trend was pretty strong and pair dropped almost 800 pips before another crossover was made! Now isn't that ridiculously easy?
We know you're probably thinking that this system is too simple to be profitable. Well the truth is that it is simple. You shouldn't be scared of something that's simple. In fact, there is an acronym that you will often see in the trading world called KISS. It stands for Keep It Simple Stupid! It basically means that trading systems don't have to be complicated. You don't have to have a zillion indicators on your chart. In fact, keeping it simple will give you less of a headache.
The most important thing is discipline. We can't stress it enough. Well, yes we can. YOU MUST ALWAYS STICK TO YOUR TRADING SYSTEM RULES! If you have tested your system thoroughly through back testing and by trading it live on a demo for at least 2 months, then you should feel confident enough to know that as long as you follow your rules, you will end up profitable in the long run.
Trust your system and trust yourself!
Summary: Creating Your Own Trading System
There are many systems out there that work, but many traders lack the discipline to follow the rules and as a result, still end up losing money.
Your trading system should attempt to accomplish 2 goals:
- Be able to identify a trend as early as possible.
- Be able to find ways to avoid whipsaws (confirm your trend).
Once you've demo traded your system for at least 2 months and you are still profitable, you are then ready to trade your system live with real money. However, you must always remember to stick to your rules no matter what!
There are 6 steps to developing your system:
- Find your time frame.
- Find indicators to help you identify trends early.
- Find indicators to help you avoid whipsaws and confirm your trend.
- Define your risk.
- Define your entry and exit.
- Write your trading system rules down and ALWAYS stick to those rules!
- Go back and time and move your chart forward one candle at a time. Trade your system according to its rules and record your trades to see if it ends up being profitable. This is called backtesting.
- If it is profitable, then you trade your system live on a demo account for at least 2 months. This will help you get an idea of how you would trade your system when the market is moving. It is a lot different trading live than manually back testing.
- Once you've demo traded your system for at least 2 months and you are still profitable, you are then ready to trade your system live with real money. However, you must always remember to stick to your rules no matter what!
Labels:
Trading Strategies
Forex Trendy is a state of the art software capable of determining the most PROFITABLE continuation chart patterns. It scans through all the charts, on all time frames and analyzes every possible breakout.
If you are wishing to generate an extra 100-200 pips per day then I advise that you check out FastFXProfit.