The old adage, that if you want something done correctly then do it yourself holds true when it comes to developing a trading system. You shouldn’t really rely on others to build your own trading system because each trader trades in a different way and feels more comfortable with different indicators.
First of all a forex trading system should be simple. Don’t develop a trading system that has so many rules that it gets complicated and you start making mistakes and losing money. The trading system needs to build up profits and also cut out losses. To do this you need to have a system that rides the trends and gets you out of a loss position very quickly. This means you need to build a trading system that follows the long term trends and doesn’t look for small profits because those small profits don’t ever cover those small losses. It’s the profits made on the trends that are big as trends can last for days, weeks, months and even years.
So what are the five easy steps to creating a profitable trading system?
1. Keep it simple and don’t have too many rules. A few good robust rules will suffice. Make sure you have some sound guidelines for your money management system. Things like how much capital are you going to risk on each trade. Where are you placing stops and limits? On which situations do you move your trading stops and limits?
2. Be on the watch for the long term trends and use your charts to be able to time your trading entry. Make sure you are looking at trends that last a month or two not just a few days.
3. Trade using the breakout method and build your system so that you recognize when a currency pair trends are going to break out. Breakout trends are when a currency pair has been trading in range for a few days and suddenly it makes a big move either upwards or downwards and meets resistance/support then retraces and makes a further move and meets resistance/support again before retracing and breaking out of the range. The actual definition of breakout trends are when a price breaks an important high or low and then makes a new high or low.
Most of the richest and most successful traders in the world trade on breakout systems.
4. Use your technical analysis indicators to give you the entry point timing. You can use Stochastics to confirm the breakout and also use the Bollinger band as a filter indicator to time your entries and your exits into profit.
5. Make sure your money management rules are robust so that you put your stops in the right places especially if you want to avoid losing too much on false breakout trends.
With a good trading system in place you will be able to make more profits, trade less frequently and rarely have a heavy loser.