1. Find entry points as early as possible.
2. Find exit points securing maximum gains.
3. Avoid fake entry and exit signals.
So, where to start from?If accomplished, these three goals will yield a profitable trading system.
2. Find exit points securing maximum gains.
3. Avoid fake entry and exit signals.
So, where to start from?If accomplished, these three goals will yield a profitable trading system.
Step One
Choosing your Time Frame
This is the first step, where you will need to answer yourself: how many hours you want to dedicate to trading? Would you prefer sitting in front of the monitor constantly for several hours trading short (5, 15, 30 minutes) time frames that would require constant market monitoring and quick reaction to price moves OR you would be more comfortable with setting up your charts once or twice a day and never turn your monitor on during the rest of the time?
This is pretty much about the comfort and free time you have on your hands that could be spend in the Forex currency world, however, while testing your new strategies you may want to find out about their performance in different time frames and then choose the most accurate and profitable option.
Step Two
Choosing Trading Tools
There are plenty of trading tools and indicators available to Forex traders, but not all of them could give the fastest signal about upcoming trading opportunities. And traders’ goal, of course, is to get into the trade as early as possible and take maximum advantage of price moves.
Among indicators that could provide traders with a fast signal about upcoming changes and possible trading opportunities are such indicators as EMA (Exponential Moving Average), SMA (Simple Moving Average), Parabolic SAR; Fast, Slow or Full Stochastic, MACD and others. The key moment here is to fully understand the principles of their work to be able to take maximum advantage of signals those indicators produce.
One of the common ways to spot a trend reversal as fast as possible is to use Moving Averages. Such simple strategy as using 5 EMA and 10 EMA crossover will show trend reversal and new trading opportunity at its earliest stage.
Another example would be Stochastic lines crossover or MACD lines crossover. The idea behind it is simple: when two line cross each other the trend is changing to the opposite and new opportunity for entry arises. Stochastic and MACD indicators also use moving averages.
Combining indicators on the one chart and experimenting with indicators values, traders can create an optimal and the fastest way to spot the early trading opportunities.
Step Three
Choosing a currency pair and finding its active trading hours
Currencies have their own “characters” or behavior. Some are extremely active like GBP/USD or GBP/CHF, some are quite consistent and steady trending like EUR/JPY or EUR/GBP.
Different indicator set-ups, different values may be used to achieve best results for each currency pair.
Also a good idea is to find the most active hours for a chosen currency pair. Those hours of currency highest activity are easy to spot on the chart and should be used to get maximum profits during the trading session.
Step Four
Choosing additional trading tools to confirm signals received earlier
Once we found time frame, indicators and currency pair(s) that respond the best it is time for the most crucial step — finding additional tools/indicators that will confirm received earlier signals and give either a green light for action or save Trader from fake-outs.
As a confirmation indicator Trader can use again any indicator or trading tool he/she is well familiar with. It is recommended to be more sophisticated in choosing additional tool to confirm the prior signal. It could be also the same indicator but with different settings.
For example, with our initial 5 EMA and 10 EMA crossover method we could use additional 20 EMA line and wait until 5 EMA crosses 10 EMA (which is the first signal) and continues through 20 EMA (which would be our confirmation for action).
Or instead, we could opt for MACD indicator – it is a very good Forex indicator that can reveal a lot of useful information. Finding the best working value set-up for MACD (it has initial settings are (12, 26, 9) ) that will perfectly match our time frame and particular currency behavior we can use it as a great confirmation indicator to separate most promising trades from fake, loosing ones.
Other good indicators/tools to confirm the signals are RSI, Stochastic, Fibonacci etc. Improvising and learning Trader can find the one that produce best results.
Step Five
Finding entry and exit points
Once indicators are chosen so that one gives and another confirms the signal, it is time to jump in and see how far you may go and how much earn.
A trader can enter as soon as signal is confirmed or in order to find the best entry point he can switch to a smaller time frame and enter at the most advantageous point.
There are two major styles for entry. First is for aggressive traders – immediate entry without waiting for the current price bar to close.
Second method is to wait until the current price bar is closed and then enter the trade with the next bar if conditions have not changed and the signal remains valid. This method is more considerate and prevents additional “false” entries.
For exits Trader can either set an amount he wants to earn per trade (for example, 25 pips per each trade), OR use trading tools that help to set profit goals (Fibonacci tool, Pivot Points studying), OR use trailing stop (usually after some profits have been achieved, instead of closing a current position Trader can wait longer to achieve possibly greater results. To secure already made gains traders use trailing stop — so when the price again makes another positive progress this stop will move same amount of times up, securing additionally gained profits. If price reverts against the open position, trailing stop won’t move and thus if hit will close the trade in profit anyway).
Another logical way to set protective stops is placing a stop depending on the market volatility at any given time. For this purpose traders use Bollinger Band tool which generates so called “corridors” around the price actions. The wider the corridor the higher is the activity on the market and vice versa. Measuring the width of the corridor (in pips) at the moment of entering the trade, Trader can easily set up protective stop out of the range of market fluctuation and thus protect himself from so called market “noise”.
When opening a new trade it is also important to calculate in advance how much you are willing to lose if the trade goes against you. Although everybody’s goal is to create the best working system,, losses are inevitable and therefore being ready to tell where you will give up your trade and cut your losses is as important as starting any trading in Forex at all.
Step Seven
Demo Trading own system to see if it works
Choosing your Time Frame
This is the first step, where you will need to answer yourself: how many hours you want to dedicate to trading? Would you prefer sitting in front of the monitor constantly for several hours trading short (5, 15, 30 minutes) time frames that would require constant market monitoring and quick reaction to price moves OR you would be more comfortable with setting up your charts once or twice a day and never turn your monitor on during the rest of the time?
This is pretty much about the comfort and free time you have on your hands that could be spend in the Forex currency world, however, while testing your new strategies you may want to find out about their performance in different time frames and then choose the most accurate and profitable option.
Step Two
Choosing Trading Tools
There are plenty of trading tools and indicators available to Forex traders, but not all of them could give the fastest signal about upcoming trading opportunities. And traders’ goal, of course, is to get into the trade as early as possible and take maximum advantage of price moves.
Among indicators that could provide traders with a fast signal about upcoming changes and possible trading opportunities are such indicators as EMA (Exponential Moving Average), SMA (Simple Moving Average), Parabolic SAR; Fast, Slow or Full Stochastic, MACD and others. The key moment here is to fully understand the principles of their work to be able to take maximum advantage of signals those indicators produce.
One of the common ways to spot a trend reversal as fast as possible is to use Moving Averages. Such simple strategy as using 5 EMA and 10 EMA crossover will show trend reversal and new trading opportunity at its earliest stage.
Another example would be Stochastic lines crossover or MACD lines crossover. The idea behind it is simple: when two line cross each other the trend is changing to the opposite and new opportunity for entry arises. Stochastic and MACD indicators also use moving averages.
Combining indicators on the one chart and experimenting with indicators values, traders can create an optimal and the fastest way to spot the early trading opportunities.
Step Three
Choosing a currency pair and finding its active trading hours
Currencies have their own “characters” or behavior. Some are extremely active like GBP/USD or GBP/CHF, some are quite consistent and steady trending like EUR/JPY or EUR/GBP.
Different indicator set-ups, different values may be used to achieve best results for each currency pair.
Also a good idea is to find the most active hours for a chosen currency pair. Those hours of currency highest activity are easy to spot on the chart and should be used to get maximum profits during the trading session.
Step Four
Choosing additional trading tools to confirm signals received earlier
Once we found time frame, indicators and currency pair(s) that respond the best it is time for the most crucial step — finding additional tools/indicators that will confirm received earlier signals and give either a green light for action or save Trader from fake-outs.
As a confirmation indicator Trader can use again any indicator or trading tool he/she is well familiar with. It is recommended to be more sophisticated in choosing additional tool to confirm the prior signal. It could be also the same indicator but with different settings.
For example, with our initial 5 EMA and 10 EMA crossover method we could use additional 20 EMA line and wait until 5 EMA crosses 10 EMA (which is the first signal) and continues through 20 EMA (which would be our confirmation for action).
Or instead, we could opt for MACD indicator – it is a very good Forex indicator that can reveal a lot of useful information. Finding the best working value set-up for MACD (it has initial settings are (12, 26, 9) ) that will perfectly match our time frame and particular currency behavior we can use it as a great confirmation indicator to separate most promising trades from fake, loosing ones.
Other good indicators/tools to confirm the signals are RSI, Stochastic, Fibonacci etc. Improvising and learning Trader can find the one that produce best results.
Step Five
Finding entry and exit points
Once indicators are chosen so that one gives and another confirms the signal, it is time to jump in and see how far you may go and how much earn.
A trader can enter as soon as signal is confirmed or in order to find the best entry point he can switch to a smaller time frame and enter at the most advantageous point.
There are two major styles for entry. First is for aggressive traders – immediate entry without waiting for the current price bar to close.
Second method is to wait until the current price bar is closed and then enter the trade with the next bar if conditions have not changed and the signal remains valid. This method is more considerate and prevents additional “false” entries.
For exits Trader can either set an amount he wants to earn per trade (for example, 25 pips per each trade), OR use trading tools that help to set profit goals (Fibonacci tool, Pivot Points studying), OR use trailing stop (usually after some profits have been achieved, instead of closing a current position Trader can wait longer to achieve possibly greater results. To secure already made gains traders use trailing stop — so when the price again makes another positive progress this stop will move same amount of times up, securing additionally gained profits. If price reverts against the open position, trailing stop won’t move and thus if hit will close the trade in profit anyway).
Another logical way to set protective stops is placing a stop depending on the market volatility at any given time. For this purpose traders use Bollinger Band tool which generates so called “corridors” around the price actions. The wider the corridor the higher is the activity on the market and vice versa. Measuring the width of the corridor (in pips) at the moment of entering the trade, Trader can easily set up protective stop out of the range of market fluctuation and thus protect himself from so called market “noise”.
When opening a new trade it is also important to calculate in advance how much you are willing to lose if the trade goes against you. Although everybody’s goal is to create the best working system,, losses are inevitable and therefore being ready to tell where you will give up your trade and cut your losses is as important as starting any trading in Forex at all.
Step Seven
Demo Trading own system to see if it works
After this long journey and fruitful research it is time to see if the system has a right to live.
Test, improve and finally write down the steps, settings and rules that will be used for trading. Once you have your system written, it is time for the big test.
Open a Demo account with any Forex broker that offers such accounts and Demo trade your system to see how well it will respond.
It is strongly recommended to do the demo trading for at least for 3 to 4 months. Among numerous reasons for that is that Forex market naturally has several periods during which its behavior may change dramatically.
For example, the market was trending well for several months while you were testing your system, then you make a decision to open a real account but the market decides to convert to its next stage and starts ranging, going sideways for indefinite period of time...You have not tested your system under such conditions and it would be very disappointing to discover that your system does not perform as well as it was doing during the trending market or is unable to bring profits at all... There are other reasons like experience and intensive practice that should motivate new traders to stick to Demo trading for a longer (sometimes up to several years) period of time.
Try next: set a goal of how much money you want to make trading Forex. Then try on your Demo account with honest trading and realistic account size achieve that goal. Once the task is accomplished, it might be the right time to think about trading with real money.
Good luck in creating your best Forex trading system!
Test, improve and finally write down the steps, settings and rules that will be used for trading. Once you have your system written, it is time for the big test.
Open a Demo account with any Forex broker that offers such accounts and Demo trade your system to see how well it will respond.
It is strongly recommended to do the demo trading for at least for 3 to 4 months. Among numerous reasons for that is that Forex market naturally has several periods during which its behavior may change dramatically.
For example, the market was trending well for several months while you were testing your system, then you make a decision to open a real account but the market decides to convert to its next stage and starts ranging, going sideways for indefinite period of time...You have not tested your system under such conditions and it would be very disappointing to discover that your system does not perform as well as it was doing during the trending market or is unable to bring profits at all... There are other reasons like experience and intensive practice that should motivate new traders to stick to Demo trading for a longer (sometimes up to several years) period of time.
Try next: set a goal of how much money you want to make trading Forex. Then try on your Demo account with honest trading and realistic account size achieve that goal. Once the task is accomplished, it might be the right time to think about trading with real money.
Good luck in creating your best Forex trading system!
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