Develop Your Own Forex Trading System
Developing Your Own System
The best way to learn forex trading is to use your demo account to develop your own forex trading system.
Here are 8 steps that you must take when developing your system.
- Choose your main chart time frame on which you will identify the trend, e.g. 1 day, 4 hours, etc.
- Select the indicators that you will use to help you identify a trend.
- Select the secondary time frame and secondary indicators that you will use to confirm the trend.
- State your risk – position size (in lots) and stop loss.
- State your entry point in relation to current price/the identified trend.
- State your exit point.
- Write down all of these rules and stick to them – always!
- Test the system (see below).
Testing your system
There are three phases to testing your system.
Use the historical charts available in your trading account or online to see what would have happened to your money if you had used your system to place trades in the past. You will need to cover at least 6 months and preferably more.
Assuming it is profitable on back tests, trade it on a demo account in real time for between 2 and 6 months depending on how frequently you trade. You may get different results here because live trading on a moving market, even in demo, is a very different experience from back testing.
If you need to tweak the system to make it profitable in demo, don’t forget to back test the new tweaked rules. Then keep on in the demo account until the tweaked version is profitable over a 2-6 month period.
Once you have a solid system that works in back tests and at least 2 months of demo trading, you can go live if you feel ready. If not, keep on in the demo account for a longer time. If and when you go live with real money, remember you must always keep to the rules of your system. This is the only way that you can make money with forex trading. In fact it could be called … The Big Money Making Secret.
To make money with forex trading there is one thing that you must apply and that is CONSISTENCY.
This means that once you have identified a profitable system, you must be able to keep to it no matter what and apply its rules to every trade that you make.
Here is why being consistent works, and flitting from one thing to another does not work:
No system, however sound, is going to make a profit on every trade. What’s more, it will have what we could call winning runs and losing runs … periods when everything or nothing seems to go right.
Imagine that your system, overall, has 80% profitable trades with individual gains big enough and losses small enough to make this ratio profitable. Do not fall into the trap of thinking that this means that if you take any 10 trades, 8 will be winners and 2 will be losers. You could have 0 losers in the first 10, 3 in the next 10, 0 in the next 10, 5 in the next 10. In fact, if you continue your system for a while, it is possible that you will have a run of 10 losing trades at some point. And the temptation at that point is to think that the system has stopped working and switch systems. But if your average over the long term is still 80%, your system is still profitable and you absolutely must not switch.
Think about it. If you drop out when you are down, and switch to something that has been doing better recently, you will be always moving in at the high point, and pulling out at the low point. You would never do that with an individual trade. You know it is a surefire way to lose. So do not do it with systems.
If you have always had a tendency to act on impulse, you will need to work on this. Remind yourself that impulsive behavior is not a fixed part of your personality. Being consistent is a skill. It is something you can learn.
Practice with a demo account, by trading on paper and by starting small when you do start with real money. You will find that as your confidence in your system increases, so does your ability to be consistent. Hold on to that confidence any time that you have doubts.
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