Guidelines to Develop Your Own Trading System

Hello, dear Forex traders. In this article, we’ll analyze such a thing as a trading system on Forex. We will answer what it is for and how to develop it properly.

A trading system (TS) is a set of rules followed by a financial market participant, when he buys or sells assets on this market.

TS allows you to organize and designate specific rules for opening a position. A trader who follows the rules of the Forex trading system knows exactly where he should limit losses, fix the potential profit, with what trading instruments, of what volume and at what time to trade.

The trading system performs a certain business plan, which significantly improves the results of the trader. A Trading Strategy organizes trading, gives a clear algorithm for entry and exit from the position, reduces the likelihood of tilt, and as a result improves the profitability of a trader.

trading system

There are many trading systems and methods for the Forex market. A novice trader can use ready-made trading systems while trading. However, in the process of becoming a trader, sooner or later you realize that you need to develop your own trading system, which will be comfortable for working. It does not have to be a strategy designed from a scratch. You can use ready-made and well-known trading systems (Bill Williams’ “Alligator” TS, “Elder’s Triple Screen” TS and so on), expanding and aligning them to your own needs.

Let’s look at the basic components of any trading system and the process of its development.

Idea

An idea is the foundation of any TC. What does the basic idea mean? We know that there can be a trend, correction periods and a flat on the market. Regardless of market conditions, the main task of any trader – to enter the market with a positive ratio of risk/profit. The first step is to determine what trading style is right for a person who develops trading system.

Some traders like not to close the order for a long time and to wait for the maximum profit. In this case, the best trading strategy will be the trend one. Usually, in such a strategy a potential profit is 3-4 times greater than the risk which a trader takes upon himself. This is due to the fact that most of the time the market is in a state of the flat. And before a trader will catch the market trend, he can get a loss several times. If the speculator joins the current market trend at the beginning of its inception, he will be able to close the previous losses very easy and make a good profit.

trend

There are traders who enjoy a more active and risky trading. Usually, they open transactions in the direction of the current trend, as well as of the countertrend. In this case, the ratio of risk/profit may be slightly lower, approximately 1/2 or 1/3.

Countertrend

When the market is in the flat, it is best to trade from key levels of support and resistance. When the price reaches the upper/lower limit of the trading range, it is necessary to consider the transactions in the opposite direction.

flat

Trading instruments

A trader should know exactly what assets and tools he can use in his trading. Usually, the currency majors: EUR/USD, GBP/USD, USD/JPY, USD/CAD, AUD/USD, – are traded on the Forex market. These trading instruments are the most volatile and liquid.

trading instruments

At the same time, the foreign exchange market has non-standard trading tactics and techniques. For example, trading on swaps. Such a strategy is called Carry Trading. In this case, the choice of a trading instrument will depend on the interest rates on foreign currency loans.

Trading sessions and timeframes

The trading plan must contain the specified timeframes, to be used for the analysis of the market situation. A trader should also exactly know which trading sessions are effective for his trading style.

timeframes

The best way is to analyze the market using multiple timeframes. It is better to identify the global market trend at the older periods of time, for example, H4-D1. The confirmation and entry point into the market should be looked for on smaller timeframes.

The most active trading on the Forex market is held during the first half of the European and the US trading sessions (10:00-20:00 GMT +2:00). Intraday traders should trade during this period. If a speculator uses a medium-term trading (H4-D1 timeframes), it is sufficient to check the charts several times a day.

Regardless of trading style, the current market situation should be analyzed on several timeframes.

Entry and exit from the position rules

Your trading system should contain the rules of entry and exit from the position. A trader should know exactly how he will analyze the current market situation and make a decision to enter the position. The most common analysis tools include indicators, technical analysis figures and Price Action patterns. Be sure to take into account the news factor.

A speculator must specify in his trading plan the level of risk which he is willing to take over, where the protective orders will be located and how he will close the potential profit. A trader can use as a fixed take profit, and a multiple trading. In such a trading way the entry into the position is made by several orders. Profit-taking is made by parts with the use of a trailing stop.

risk-profit

A speculator must always adhere to the “golden rule” in trading – our potential profit should be several times greater than the risk that we take upon ourselves.

Risk level

Risk management is the most important component of any trading system. Most successful traders say that the correct control of risk is the key to success in stock trading.

The basic rules of risk management are:

risk management

You should always bear in mind that the Forex trading is, in fact, a trading of probability and expectations. There are both loss-making and profitable trades. The most important thing is to follow the rules of the trading system and open positions with a positive mathematical expectation. I.e. our potential profit must exceed the potential loss in several times (1:3; 1:4).