A quick search on your favorite internet search engine for the phrase “FOREX trading system” will yield thousands of results, all of which will try to convince you that theirs is the only sure-fire profit making system available. The truth of the matter is that yes, some or most can make you money, but you don’t need to pay someone else to teach you something that’s really pretty simple to create for yourself.
At its core your FOREX trading system needs to be able to spot trends early and also be able to avoid sharp rises or falls due to a particularly volatile market. At first glance this may seem like a difficult thing to accomplish and to be honest no FOREX trading system will perform both functions flawlessly 100% of the time. However, what we can do is design a trading system that works for the vast majority of the time – this is what we’ll focus on when designing our own FOREX trading system.
So, what elements do we need to consider for our custom system? The most important criteria are as follows:
1. What kind of trader are you? Do you like to follow long trends, or are you glued to your charts for 8 hours straight per day? If you’re new to FOREX trading it’s suggested that you stick to long term trading as it’s far easier to spot trends and cut your losses when compared to day trading.
2. Find an indicator you’re comfortable with. Knowing when to buy is key to generating big profits, so it’s important to understand some of the key indicators and how they can identify trends. Moving averages are probably the easiest indicators to work with and can be very useful in recognizing emerging trends.
A common tactic is to use two moving averages, one slow and one fast, and wait for the fast average to pass above or below the slow average. This is commonly known as the moving average crossover technique. As with everything else in the trading system it’s simple, easy to understand, and effective.
3. Risk Management. Successful FOREX traders understand that you *will* lose money at some point or another, no matter how effective your trading system is. You will always want to use a stop-loss on all your trades, but the amount risked will vary from person to person based on their experience and available capital.
Knowing where to set your stop loss can be tricky – you want to limit how much you could possibly lose so you’d be tempted to set a very small range, but at the same time you want to allow for short term rises and falls so that you don’t exit your position too early.
4. Know when to get out. Knowing when to exit a trade can be just as tricky as knowing when to enter, but for your custom trading system you want to pick one way that you’re comfortable with and just stick with it.
One simple technique is called the ‘trailing stop’ technique, and all this entails is updating your stop loss as your position increases in value. Another popular method used in many FOREX trading systems is to set a target and get out when that target is reached. This can be based on support or resistance, or simply based on a certain number of pips. Find a method you’re comfortable with and stick with it.
5. Test your FOREX trading system. So you now have a trading system that tells you when to enter and exit a trade, so see how it performs using real data. Find historical data for a currency you’ve thought about trading, and analyze the charts. Apply your trading system to the data you see in the charts and write down the results.
Was the system effective? Would you have turned a profit or a loss? Try your trading system on several different charts and record the results. If you’ve got a winning system then it’s time to move onto live data via a demo account. Practice makes perfect and you don’t want to risk real money until you’re confident your trading system can provide you with decent profits over time.
