Forex trading is a lucrative way to make money online. However, it is not as easy as it sounds.
You need a solid strategy and a clear plan to succeed in the forex market. You will likely lose money, get frustrated, and quit without a trading system.
A trading system is a set of rules you follow when trading. It helps you identify opportunities, manage risk, and evaluate your performance.
Also, with a trading system, you can avoid emotional and impulsive trading mistakes.
But how do you create your trading system? It may seem daunting, but it is not impossible.
In fact, you can create your own trading system on your Android or iPhone stock trading app in five simple steps. In this article, we will show you how to do it. Let’s get started!
Contents
Define Your Trading Style and Goals
First, figure out what you want to achieve and how you trade.
Your trading style is how you approach the market, and it depends on your personality, risk tolerance, time availability, and capital.
There are many trading styles that you can adopt; some of them include:
Scalping: where you take small profits from frequent trades, usually lasting from a few seconds to a few minutes;
Day trading, which involves opening and closing trades within the same day without holding any positions overnight;
Swing trading requires holding trades for several days or weeks to capture medium-term price movements.
Your trading goals are what you want to achieve from your trading, and they should be specific, realistic, and time-bound.
Your goal could be to make a 10% return on your account in 6 months or to double your account in 2 years.
Whatever it is, it should reflect your style, capital, and risk appetite.
Choose Your Market and Time Frame
Your market is the financial instrument you trade, such as currency pairs or commodities.
There are many markets that you can trade in the forex market, such as:
Majors
These are the most liquid currency pairs involving the US dollar and other major currencies, such as EUR/USD, GBP/USD, USD/JPY, USD/CHF, AUD/USD, USD/CAD, and NZD/USD.
Crosses
They do not involve the US dollar, such as EUR/GBP, GBP/JPY, EUR/JPY, AUD/NZD, EUR/AUD, and GBP/AUD.
Exotics
They combine the US dollar and other minor or emerging market currencies, like USD/ZAR, USD/TRY, USD/MXN, USD/SGD, and USD/NOK.
The time frame you choose to examine price movements is the duration, in minutes, hours, days, or weeks.
Time frames could be short-term, medium-term, or long-term.
Different time frames offer trading signals and opportunities. So, before you decide, you should know how they work.
Identify Your Entry and Exit Rules
Entry and exit rules determine when and how to enter and exit the market, and they are based on technical and/or fundamental analysis.
Here are the things your entry rules should specify:
The direction of the trade
the signal or condition that confirms the trade opportunity, such as a breakout, a crossover, a reversal, or a divergence
the additional evidence or filter that validates the trade signal
the technique that you use to enter the market.
Similarly, your exit rules should specify the support or resistance level, extension level, and stop loss of the trade.
Backtest and Optimize Your Trading System
Backtesting involves testing your trading system on historical data, using a trading platform or software to see how it would have performed in the past.
While it’s important to know how a trading system performed in the past, you also need to fine-tune it to see how it can perform better in the future. And that’s optimization.
Backtesting and optimizing your trading system can help you to:
Evaluate the performance and profitability of your trading system using metrics such as win rate, risk-reward ratio, average profit, average loss, and profit factor.
Identify the strengths and weaknesses of market conditions, time frames, and currency pairs.
Improve the effectiveness of your trading system by adjusting the parameters.
Implement and Monitor Your Trading System
The final step is to implement and monitor your trading system.
Implementing is applying your trading system to live data to see how it performs in real time. Monitoring is the process of tracking and recording your trading system to see how it evolves.
Implementing and monitoring your trading system makes it easy to execute it consistently.
Aside from that, it helps you to analyze your trading results, journal your trading experiences, and learn from your trading mistakes.
Time frames could be short-term, medium-term, or long-term.
Conclusion
A trading system can improve consistency, risk management, and performance evaluation. Following the steps discussed in this article can help you build a trading system that matches your personality, preferences, and objectives.
Creating your trading system is not a one-time event but a continuous process. It requires a lot of research, testing, practice, and patience. However, it can also be gratifying, as it can help you achieve your trading goals and become a successful forex trader.
