A trading system is a set of rules for finding, entering and exiting trades. There is no holy grail system. No system is better than any other. A good system is one that is adapted to your goals, your time frame, your capital and your personality. A trading system not only helps you manage risk, but removes emotions from trading. This article will guide you to design a trading system step by step
Begin asking yourself , what is your favourite timeframe, you need to decide what kind of forex trader you are. For example, day trader, swing or position trader. If you want to hold a trade for several days or weeks then you are a swing trader and you should use daily charts. Day traders who use shorter time frames such as 5 minute chart, 1 hour, or 4 hour chart. They open and close their positions intraday. They do not like holding their trades overnight. Of course, you can use multiple time frames but you should define one main time frame to trade.
Trend is your friend. And there are many ways to define the trend. For example, moving averages are one of easiest way to use. In addition, we need to avoid whipsaws or a false trend. We can eliminate that by using indicators like MACD, Stochastic, Relative Strength Index RSI, ADX, Ichimoku, etc. You can combine them in your trading system but you should not use too much indicators. From 2 to 3 indicatores is enough.
This means you need to define how much you are willing to lose on each trade. Do not risk too much on one trade. The simple rule is only risk 1%- 2% your capital per trade. Risk and moneymanegement play a vital role in your trading system. Without them, you can not survive even you have a good trading system.
This step is to find out where you will enter and exit your trade. It depends on your trading style. Some people like opening a position as soon as their indicators give them a good signal even the candle has not closed. On the other hand, some people wait a clear signal and close of the candle. For exits, you can use trailing stop or set a target. It is up to you. Some people set their targets near support, resistant levels. But your risk/ reward ratio should be less than 1. 1/2, 1/3 or lower are optimal.
You need to write down all your trading system rules and always stick to them. It is called Discipline. It is the most important characteristic of a trader. It is similar to a warrior, you can not survive if you do not have discipline.
Before trading real money with your own system, you need to test it. The first step is backtesting. This means you apply system's rules to a stretch historical data. The second step is trade a demo account for several months. After trading your demo account andding you make profits consistantly, you can choose to trade a live account.