How to Develop Your Own Trading System

by: Mohammad Hafiz
trading system

I’ve already written about different strategies and Forex trading tips for those who already have some real experience. But what should do those who have just entered the Forex world? As every expert says, create your trading system. Sounds easy, but in fact, this phrase includes a series of steps that should be passed through obligatory. There is no short-cut way and I’m going to tell you what is this trading strategy (system) for and how to develop it properly.

What is a trading system?

A trading system (TS) or a trading strategy is a special set of rules for a participant of the financial market. He uses them while buying or selling assets on the market.

TS gives an opportunity to organize and designate specific rules for opening an order. A trader who knows the rules is well aware of how to limit losses, take profit, what trading instruments to use and when to trade.

It is like a business plan, which helps to improve the trader’s results. A Trading Strategy organizes the whole process, gives an algorithm for entering and exiting from positions, improves the whole profitability.

trading system

In fact, there is a plenty of systems and methods. Newbies can use already existing trading systems at the very beginning. Nevertheless, every novice sooner or later realizes that he should develop his own trading system which fits his requirements. By the way, this strategy doesn’t need to be designed from a scratch. A trader can use some well-known one (for example, Bill Williams’ “Alligator” TS or something else), he can just expand and align it to his needs.

Now I will name all the components that have to be developed while creating your own trading system.

1. Creating an idea for your trading system

At first, you have to make the foundation for your strategy. What does it mean? It should be noted that there are trends, flats, correction periods and other conditions on the Forex market. The main task for every trader is entering and exiting the market with less risk and more profit regardless of these conditions. So, the first step for every trader is making out the style of working with Forex to know when and how to work with those circumstances.

Some people prefer to open long-time deals and get the maximum profit. The best system for them is the trend one. Here a potential profit overcomes a trader’s risk, as the market is in the state of flat most of the time. Nevertheless, a trader can meet losses before he catches his profit. If a trader starts working with the trend at its beginning, he will have a chance to close all the losses he had before and make profit.

Others prefer more risky and active trading. They are called intraday traders or scalpers. They open deals both in the trend’s direction and countertrend. The risk/reward ratio is lower in this case and can be 1/2 or 1/3. They trade from the support and resistance levels when the Forex market is flat. And when the price comes to the trading range limit, they think of opening orders in the opposite direction.

2. Choosing trading instruments

Every trader has to be sure which assets and tools he will use while working on Forex. Usually, people trade major currencies such as EUR/USD, USD/JPY, GBP/USD, etc. These ones are the most liquid and volatile.

There can be some unusual tactics. Trading on swaps (Carry trading) is a clear example. Here the pair will be chosen depending on the interest rates.

3. Choosing timeframes and trading sessions

Timeframes are needed to perform a technical analysis of a currency pair. It’s also important to know which trading sessions fit your trading style.

The best way of analyzing the market is using of several different timeframes. On H4-D1 the trend can be defined more clearly. Smaller timeframes usually help in looking for the confirmations and entry points.

As for trading sessions, the most active are European and the US ones. 08:00-18:00 GMT is the best time for intraday traders and scalpers. Medium-term traders should look through charts several times per day during different sessions.

Anyway, the situation on the Forex market should be analyzed on 2-3 timeframes regardless your trading style.

4. Defining the rules of entering and exiting from the positions

exit

Every trading strategy should have such rules. A trader should use analysis tools (indicators, technical figures, Price Action patterns) to make sure that his order can bring profit. Also, the news factor should be taken into account.

All the risks should be figured out as well and Stop loss and Take profit orders are better to be set too. There are two ways of closing profit:

  • The fixed Take profit order helps to close profitable transactions on the level you put.
  • Multiple trading is made by several orders, so profit is taken by parts with the use of a trailing stop.

Note the “golden rule” of traders: a profit has to be X-times greater than a potential loss (risk).

5. Figuring out the risk level

Risk management is a very important part of every trading strategy. Some traders even think that it’s the edge and the main secret of their success.

Here are the basic rules of the proper risk management:

  • Never risk with all your funds. Risk with less than 2% of the whole capital.
  • Your potential profit has to be larger than risks in at least 2-3 times.
  • Use protective orders (Stop loss and Take profit).
  • Follow your trading plan and don’t step away from it.
  • Don’t be greedy and fix profit as it planned by your strategy, don’t try to earn more with one order.

Remember that trading on Forex is a business of expectations and probabilities, so there can be both profitable and losing trades. Anyway, you should trade close to your strategy and follow the rules of the trading system you created for yourself.

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