I usually see many traders are looking for a trading system that would make them profit continuously. I was one of them some time ago. What I come to realization that a trading system must fit one’s personality to be a successful one. Another insight was that such a system anyone could create himself. It only requires some experience of observing the price action on the charts. If you are looking for a perfect system I advise you to try to create your own trading system. I usually implement the following four steps.
1. Currency pair and time frame choice
First you need to decide what currency pair you are going to trade. Since all of them behave differently there are not many systems that will be equally profitable for all pairs. The second thing you need to pick your favorite timeframe. Usually the choice of the time frame comes from the trading habits. If you are a part-time trader a daily chart may be the best for you. If you can spend all day in front of your charts then 15-minute charts make sense to consider.
2. Buy and sell signal generation parameters
The next step is to study your charts with various parameters. It can be some indicators, pivot points or candlestick patterns. You need to find a parameter that would be a good signal to enter the market. Put the rules of your signal on paper. They can be something like “if price brakes above the previous day range place buy order, if price brakes below the previous day range place sell order”. You also need to decide on placing stop-loss and take profit levels.
3. Historical data test
Once you have the rules of your system in place it is time to test them on the historical data that comes with your charting platform from your broker. Start as far back in time with your trading system. Move one candle at a time and look at the parameters of your system. As soon as you see the signal is generated place a horizontal line at the price where you would enter the market. Now according to the rules of your system place the lines at the stop-loss and take profit levels. Continue to go forward. Once price hits the take-profit or stop-loss line record the gain or loss into a spreadsheet. Continue until you reach at least 100 trades. Now it’s time to calculate the mathematical expectation of your system. If it is positive follow to the next step. If it is negative you have to redefine the rules either for buy and sell signal or the rules for stop-loss and take profit placement.
4. Paper trade on a demo account.
Now you have the rules of your system in place and it is profitable on the historical data. It is time to test it in real time trades. Most brokers allow you to open a demo account to practice your trades. Execute at least 100 trades based on your system. This will do two things for your. First you will find out if this system is profitable in real time trading. Second you will develop a habit of recognizing your signals and acting upon them without hesitation.
Albert Schmidt is a part-time currency trader. After quite a few months of struggle he learned to make consistent profit trading in Forex.
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