What's the perfect trading system? This is a question I often here. But there is no right answer to a wrong question. What is the right question? The right questions should sound something like this: What is the perfect Forex trading system for you? I know form my experience that the perfect system is the one I develop myself. It's not a rocket since to develop a trading system that fits your personality in the best way. These are the four simple steps to create your own trading system. All you need is some experience with trading charts and indicators.
1. Chose your favorite currency pair and timeframe.
It is important to decide what currency pair you would like to trade since they behave differently. Not very many systems can be applied to any currency pair with the same success rate. The next step is to pick your timeframe. It will depend on your trading schedule. If your are trading part-time as I do and have only small amount of time to look at the charts then you choice will be the daily charts. If you are full time trader and can monitor your trades continuously then you can choose 15-minute charts.
2. Parameters of the system that generate buy-sell signals
The next thing you should do is to study your charts and find the right parameters that generate buy or sell signal for you. This is what you need to understand: since you are the one who picks the signal parameters they will be the most obvious to you. That's why many systems developed by one trader may not work for another one. The signals may not be so obvious for other traders. These signals can be anything something like cross of the moving averages of candlestick patterns. Write down the rules of buy and sell signals. You need to figure out the take-profit and stop-loss levels as well.
3. Back testing on historical data.
Most charting platforms come with the significant amount of historical data that you can test you trading system on. All you need to do go back on the data of the currency pair of your choice. Put your indicators on the chart if you need them. Go forward in time and as soon as you see buy or sell signal of your system place a horizontal line across the chart at the entry price level. Place take-profit and stop-loss levels on the chart as well. While you go forward in time look when price hits the stop-loss or take profit. Record the result into a spreadsheet. Repeat this process at least 100 times. Once you finished calculate the mathematical expectation. If it's positive then you move to the next step. If it is negative go back to the previous step and redefine your parameters of buy and sell signals.
4. Test on a demo account.
The last step of a system development is to test in real time on a demo account. Again perform at least 100 trades with your system. Calculate the mathematical expectation of your system. If you get positive result then you are ready to move on to trade it on your real account. Executing the trade on a demo account will do one more thing for your. You will develop a habit to execute your trade without hesitation. So the execution errors caused by emotions will be minimal.
Albert Schmidt is a part-time currency trader. After quite a few months of struggle he learned to make consistent profit trading in Forex. Review a Forex trading system he successfully uses in his trades. |
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