Are you tired of chasing after elusive success in forex trading? Have you ever felt you were missing a critical piece of the puzzle that could turn your trading into a profitable endeavour? Well, that’s every trader’s struggle! What makes this challenging is none other than the forex market itself.
Because the market swings from time to time, it gets challenging for traders to create a strategy that works in accordance with it. Creating a winning forex trading system requires more than just luck; it demands a systematic approach, dedication, and comprehensive knowledge of market dynamics. For example, you should know how to incorporate indicators and trading tools to trade with precision.
Without this knowledge and the right steps to build your trading system, you could feel astray. Therefore, in this guide, we will walk you through the six essential steps to designing your very own forex trading system that can potentially turn the tide in your favour.
Step 1: Time Frame
Picture this: You’re in a race, but you have no idea how long the track is. Would you sprint or jog? Similarly, in forex trading, your chosen time frame is the track’s length.
Every trader has to choose a time frame to trade so they can identify their trading style and build a system around it. There are many benefits to choosing the right time frame for your trading. Not only does this help you align your trading strategy with your personality, but you also get the time to analyse the market and avoid being rushed.
The forex market gives you plenty of time to trade. Short-term traders trade with minute-to-hour charts, while long-term forex traders linger in the market for weeks or months, waiting for the right opportunity. Thus, this is the choice you have to make on your own based on your trading preferences.So, ask yourself: Are you a scalper looking for quick wins or a swing trader in it for the long haul? Your time frame dictates your trading style, risk tolerance, and the indicators you’ll use. As a scalper, you should focus on capturing quick pip movements and exit the trade. You need to do it multiple times a day to make decent profits. To find out how much you have made in total, use a currency calculator, which converts your profits into your account’s base currency.
On the other hand, swing traders trade on a longer time frame and capture more pips. Remember, the market is a living entity — it behaves differently in various time frames. Choose one that you find best for your trading goals.
Step 2: Find Indicators that Identify a New Trend
To build your trading system, you need to know the market’s direction. And this is where trading indicators play an important role. Typically, there are three types of trends in the market: upward, downward, and sideways.
A successful trader knows his/her way around indicators and how to use them. So, your next step should be to get acquainted with different indicators in the market. Examples of indicators are MACD, Moving Averages, RSI, etc.
Moving averages, MACD, and the Parabolic SAR are like the early warning systems of the trading world. They help you identify potential trends before they become mainstream, giving you a head start on the competition. It doesn’t matter which trading platform you are using, be it MT4 or MT5, you can find and use these indicators to trade smartly. However, it is better to test the effectiveness of these indicators in a demo account before using them in live trading and practice, MT4 seems to be a better option compared to MT5, particularly for newbies due to its simple UI.
Some indicators work better for traders, depending on their style of trading. For instance, RSI indicators are best for short-term traders, especially scalpers. It is best to get acquainted with different indicators before you try them out.
Step 3: Find Indicators that Confirm the Trend
While spotting a trend is half the battle, confirming its authenticity is the other. This is where oscillators like RSI and Stochastic oscillators come into play. They will guide traders in finding out whether the market has veered too far from its course.
However, you should know that trends can be deceptive, changing their course abruptly. Thus, you need to verify your trends with other indicators. Having a confirmation indicator is like having a second opinion from an expert.
Step 4: Define Your Risk
Ah, risk—the elephant in the trading room. How much are you willing to wager on a single trade? This is not a decision to be made in the heat of the moment. You should spend enough time on this because your risk will determine both your strategy and market performance.
Setting a fixed percentage of your capital for each trade—your ‘risk per trade—shields you from catastrophic losses. A popular trader’s thumb rule is not to risk more than 2% of the trading capital. Although not all traders follow it, this can help traders avoid unprecedented market risk.
Because even when the market plays its tricks, this predefined risk level remains your safety net. You should trade with the margin you’re comfortable with because trading with a bigger margin can magnify your losses or blow up your account. Therefore, use a margin calculator to find out the correct margin needed to trade safely.
Step 5: Define Entries and Exits
Trading is all about timing. If your strategy is perfect, but if you want to enter and exit your trades on time, your trading system will not fetch you the maximum results. So, where do you enter a trade? And where do you exit to secure your profits or cut your losses?
This is where your system’s rules must be implemented. There are many ways to find the right entry and exit points. Fibonacci retracements, support and resistance levels, and candlestick patterns are favourites among traders. Having clear criteria for these decisions reduces emotional interference and keeps you disciplined.
Step 6: Write Down Your system’s Rules and Follow them
Imagine having a recipe for a delectable dish but deciding to throw in random ingredients. It sounds like a disaster waiting to happen, right? Similarly, follow your trading system’s rules once you’ve established them on time.
From your time frame and indicators to entry and exit points, follow everything as planned. Do not be influenced by greed. One of the top reasons why some traders fail to get consistent results is because they fail to execute their trading system as planned. Write down all the rules you have planned to execute and follow them exactly.
If it doesn’t work, don’t worry. You will have plenty of time to correct it. But system rules are your trading bible, a roadmap to consistency and profitable trading. Hence, follow it to the core.
How to Test Your Forex Trading System
Before you unleash your trading system on live markets, you must put it to the test. And there is no better way to do so than through demo trading. Or, if your trading system fails, you can use historical data to simulate trades and evaluate its performance.
This ‘backtesting’ can highlight strengths and weaknesses, helping you update your approach. The benefit of backtesting is that you can run multiple trades to improve your strategy. However, there could be some discrepancies with the results when trading in the live market, but the difference is not a problem if you execute your trades properly. The critical part is to execute it without getting influenced by emotions. Professional forex traders backtest their strategies once every three months. You can backtest it as you like and be consistent with it.
“The expert in anything was once a beginner.” Helen HayesCrafting a profitable forex trading system isn’t a sprint; it’s a marathon. You can’t create one strategy and leave! The job never ends. You have to refine it for as long as you are trading consistently. Initially, you might struggle because you will have trouble understanding time frames, indicators, and other tools.
However, if you keep up with the six steps discussed In this article, you will build your trading strategy in no time. And, not to lie, there will be some ups and downs. But stay patient, keep learning, and always appreciate the power of a demo account to test your system in real market conditions without risking your hard-earned money.
So, are you ready to design your forex trading system and take control of your trading destiny?