A good forex trading system is very important if one wants to see any form of consistency in profits while trading. Having a good system doesn’t mean the trader will have a 100% accuracy level, but the number of winning trades will be more than losing trades.
Tips for developing a forex trading system
Get an indicator that signifies entry
There are several indicators on the web that help a trader know when the market is about to go on a bullish or bearish run, and most of them are as simple as a blue arrow for a buy trade and a red arrow for a sell trade. Even on the Metatrader platform, there is the parabolic SAR, for example, which flips under a candle to signal the start of a run, and when above the candle it signals the start of a down trend. Look for an indicator that functions in a similar simple manner.
Another indicator that acts as a filter
You do not want to be taking sell trades when the market is clearly in a bullish trend and you also do not want to be taking buy trades when the market is in a bearish trend. Therefore, you need another indicator that will help you weed out what trades to take and which ones to avoid.
Most indicators used as filters are based on higher timeframes and, so, they retain the bigger picture. Using our PSAR example, you can add a MACD from your Metatrader platform to the PSAR and when you get a flip on the hourly charts you will look at the MACD on the four hour to see if it is in line with the signal you just got. This is assuming you know how to read these indicators, though, but generally, this is how it is supposed to be. When you get the signal, the filter helps you decide if it is a valid signal or not.
Money management rules
Without these rules, every trading system is worthless. You need to sit down and work out what percentage of your trading account you are comfortable with losing on any single trade and what position size you will take with every milestone achieved in your account balance. Your money management rule is the ultimate decider of the success or failure of your system, so you must give careful thought when working this out – and also be ready to stick with it as long as you stick your trading system.
If you are not able to determine if you have a signal or not by glancing at your charts for 3 seconds then your trading system is too complicated. The simplest trading systems are usually the most profitable, while those complicated systems only end up doing more harm than good to the trader using it. A complicated system is one that mostly requires 4 or 5 indicators to line up in one direction before a position is taken and in forex this rarely happens. By the time 4 indicators agree on a position, the trend must likely have moved significantly, and the trader risks entering right in the middle of a retracement.
Once you have a forex trading system that has all that is listed here, all that remains is a bit of back test and then forward test. After consecutive 3 months of profit with the strategy, you can then call it a good forex trading system.