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  Forexopia  »  Intermediate  »  Creating your trading system Forex Trading  »  Steps to create your trading system

Steps to create your trading system
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Creating a trading system checklist - if you look up on web - its hyped-up - everybody talks about in some sort of a mystic language - some spiritual path you need to follow and some even call it "the ultimate solution / Holy Grail" - in reality - It's anything but.

Trading system if I may draw a parellel is like a "checklist before you go on a long drive"

An average american travels daily within a 40-mile radius. That's the what the car companies say and they are building a battery to support this travel - hopefully by 2010 we'll have one. I digress.

OK let's come up with a simple checklist:
In Driving TermsIn Trading Terms
1Most important - rule #1 - do you have GAS? (petrol for our non-american friends) - this is the most overlooked and most abused idea in trading - trying to get to point B from point A - requires gas -and you also need a bit of extra gas to reach home - if u wandered off. This phenomenon of trading without enough capital is called Overtrading - suprisingly a very common phenomenon among new traders.Capital
2You can't just turn on your car and start driving - first you need to know "Where you are driving to"what is your PROFIT-goal? - how much to do you wish to make on THIS ONE particular trade in question - do you know? - you should before you place the trade.Goal
3Did you figure out an approx time to reach there?How long will you hold your position to reach this PROFIT-goal?Time
4Did you look for road-blocks/construction areas?Road-blocks/construction areas would be NEWS (fundamentals) like Non-farm pay roll/unemployment rate/fed-rate decision - releases - where markets violently move up & down - causing road jams - and creating huge spreads for a very short period of time.News
5Did you ever get lost? - you want to get somewhere - and you don't seem to find that place - so how long will you spend trying to find that place? - 30 mins / 1 hr? - at some point - you have to give up and head back - afterall, you need to go home for the night."Learn When To Quit" - don't let your ego tell you that you are a bad driver (bad trader) because you couldn't reach your goal - not all goals are meant to be reached - some are simply meant to teach you lessons.Stop


Let's set some ground rules for the above. Remember rules are good - keeps us driving in our lane.
  1. Capital = no more than 2% (or max 5%) of your capital should be dedicated to any single trade.
  2. Goal = should always be in PIPS (not $$$)
  3. Time = should be sessions/days
  4. News = look out for those road-blocks/construction areas - NEWS changes everything
  5. Quit = Stop-loss (at some point you accept that your analysis proved wrong and quit) - stop-loss also allows you to swallow your ego and keep your capital - so that you can trade again.

Based on these 5 things - let's customize our checklist. Let's say we are trading eur/usd on a mini account. We know that for each lot pip=$1

RulesPersonalizedOutcome
1CapitalLet's say you have $10,000 in a Mini-forex account - taking the 2% rule =
  • 2% of $10,000 = $200 for a single trade
  • $200 = 4 lots
  • $1/pip X 4 (lots) = $4/pip
    2GoalSince we are trading eur/usd which has an average daily range of 75 pips. Let's aim for 20 pips/day20 pips X $4/pip = $80/trade
    3Time
  • I prefer trading 4hour charts -
  • I live in west-coast.
  • I sleep late (after 1am)So, I will choose 9pm candle (on a 4-hour chart) to trade.

  • Option 1:Enter at 9pm and quit at 1am or
  • Option 2:if the trade is positive and I think has over-night potential I let it trade till 7am - when i wake up.
  • Option 3:The best - my trade hits limit order and is closed overnight. Since I know I need only 20 pips - I place a "limit order"
  • Max-time = 2 1/2 sessions = 10hrs
  • (9pm entry - continued trading on 1am candle & 5am candle)Now, we know the order is still in the market at 7am - we call it quits.
  • 4NewsMost news are released during early hours of the day (EST) - you can check weekly calendar at DailyFX.com and sort by priority too.If there is an upcoming new release - don't place any overnight trades. Period.
    5QuitThis is VERY easy. We know our goal=20pips=$80 Evidently, if we want to make 20 pips - we won't risk 50 pips doing that. so 1:1 ratio wisdom dictates that we should have my stop-loss at 20pips-below the entry.on the other hand, you can choose to have 1:2 ratio and aim for 40pips (risking only 20pips)Stop-loss = 20pips= -$80


    Now we know - what our trading system need to do:
  • Earn you 20 pips per trade (have a limit order)
  • Exit your trade when its goes negative 20pips

    Your wisdom dictates that:
  • You don't trade overnight on day of news release(s)
  • You quit your trade (profit or loss) 10hrs or 2.5 sessions after entry

    Any successful trade that fits your "trading system checklist" is enroute to being a trading system. If you made money - reached your goal (20 pips in the above case) and you are able to replicate the results - Congratulations! you have a successful trading system.
    So - go ahead and create a trading system that fits your rules - you will have consistent returns.

    Warning: there is no trading system in place that will
  • generate you 20pips/day- EVERY DAY
  • or for that matter 20pips/trade EVERY TRADE - (anybody who tells you that in our experience is simply lying).

    Just like humans (since trading is nothing but collective human behaviour) - best of the trading systems will have a few "bad hair days".

    You can find and even create a few that will generate a bit more once or twice a week. That's the reality.

    Please note: The above example is just that - an example. Its better to come up with your own rules (maybe only 1% of your capital, keep the trade longer/lesser than 2 sessions etc) - based on your capital, time dedicated to trading etc. read our disclaimer

    Here are few places on the web - Forex Forums - where users post their trading systems. (Forexopia.com does not endorse any of them) These links are provided as a courtesy.
    In closing: every one of us has had atleast one-successful trade. Many of us spend way too much time figuring out BAD trades - when we should spend double the time figuring out GOOD trades - what did I do that made me profit? - what were the settings? - can I replicate the same results?.

    If you can replicate any of your successful trades 7 times out of 10. You have a trading system. Period.

    Go. Figure out your good trades.



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    CHAPTERS
    Reading Charts Forex Trading
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    »What is a trading system
    »Steps to create your trading system
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      Forexopia  »  Intermediate  »  Creating your trading system Forex Trading  »  Steps to create your trading system

    Steps to create your trading system
    Printer FriendlyFont size:  Small  |  Medium  |  Large  |  Extra Large


    Creating a trading system checklist - if you look up on web - its hyped-up - everybody talks about in some sort of a mystic language - some spiritual path you need to follow and some even call it "the ultimate solution / Holy Grail" - in reality - It's anything but.

    Trading system if I may draw a parellel is like a "checklist before you go on a long drive"

    An average american travels daily within a 40-mile radius. That's the what the car companies say and they are building a battery to support this travel - hopefully by 2010 we'll have one. I digress.

    OK let's come up with a simple checklist:
    In Driving TermsIn Trading Terms
    1Most important - rule #1 - do you have GAS? (petrol for our non-american friends) - this is the most overlooked and most abused idea in trading - trying to get to point B from point A - requires gas -and you also need a bit of extra gas to reach home - if u wandered off. This phenomenon of trading without enough capital is called Overtrading - suprisingly a very common phenomenon among new traders.Capital
    2You can't just turn on your car and start driving - first you need to know "Where you are driving to"what is your PROFIT-goal? - how much to do you wish to make on THIS ONE particular trade in question - do you know? - you should before you place the trade.Goal
    3Did you figure out an approx time to reach there?How long will you hold your position to reach this PROFIT-goal?Time
    4Did you look for road-blocks/construction areas?Road-blocks/construction areas would be NEWS (fundamentals) like Non-farm pay roll/unemployment rate/fed-rate decision - releases - where markets violently move up & down - causing road jams - and creating huge spreads for a very short period of time.News
    5Did you ever get lost? - you want to get somewhere - and you don't seem to find that place - so how long will you spend trying to find that place? - 30 mins / 1 hr? - at some point - you have to give up and head back - afterall, you need to go home for the night."Learn When To Quit" - don't let your ego tell you that you are a bad driver (bad trader) because you couldn't reach your goal - not all goals are meant to be reached - some are simply meant to teach you lessons.Stop


    Let's set some ground rules for the above. Remember rules are good - keeps us driving in our lane.
    1. Capital = no more than 2% (or max 5%) of your capital should be dedicated to any single trade.
    2. Goal = should always be in PIPS (not $$$)
    3. Time = should be sessions/days
    4. News = look out for those road-blocks/construction areas - NEWS changes everything
    5. Quit = Stop-loss (at some point you accept that your analysis proved wrong and quit) - stop-loss also allows you to swallow your ego and keep your capital - so that you can trade again.

    Based on these 5 things - let's customize our checklist. Let's say we are trading eur/usd on a mini account. We know that for each lot pip=$1

    RulesPersonalizedOutcome
    1CapitalLet's say you have $10,000 in a Mini-forex account - taking the 2% rule =
  • 2% of $10,000 = $200 for a single trade
  • $200 = 4 lots
  • $1/pip X 4 (lots) = $4/pip
    2GoalSince we are trading eur/usd which has an average daily range of 75 pips. Let's aim for 20 pips/day20 pips X $4/pip = $80/trade
    3Time
  • I prefer trading 4hour charts -
  • I live in west-coast.
  • I sleep late (after 1am)So, I will choose 9pm candle (on a 4-hour chart) to trade.

  • Option 1:Enter at 9pm and quit at 1am or
  • Option 2:if the trade is positive and I think has over-night potential I let it trade till 7am - when i wake up.
  • Option 3:The best - my trade hits limit order and is closed overnight. Since I know I need only 20 pips - I place a "limit order"
  • Max-time = 2 1/2 sessions = 10hrs
  • (9pm entry - continued trading on 1am candle & 5am candle)Now, we know the order is still in the market at 7am - we call it quits.
  • 4NewsMost news are released during early hours of the day (EST) - you can check weekly calendar at DailyFX.com and sort by priority too.If there is an upcoming new release - don't place any overnight trades. Period.
    5QuitThis is VERY easy. We know our goal=20pips=$80 Evidently, if we want to make 20 pips - we won't risk 50 pips doing that. so 1:1 ratio wisdom dictates that we should have my stop-loss at 20pips-below the entry.on the other hand, you can choose to have 1:2 ratio and aim for 40pips (risking only 20pips)Stop-loss = 20pips= -$80


    Now we know - what our trading system need to do:
  • Earn you 20 pips per trade (have a limit order)
  • Exit your trade when its goes negative 20pips

    Your wisdom dictates that:
  • You don't trade overnight on day of news release(s)
  • You quit your trade (profit or loss) 10hrs or 2.5 sessions after entry

    Any successful trade that fits your "trading system checklist" is enroute to being a trading system. If you made money - reached your goal (20 pips in the above case) and you are able to replicate the results - Congratulations! you have a successful trading system.
    So - go ahead and create a trading system that fits your rules - you will have consistent returns.

    Warning: there is no trading system in place that will
  • generate you 20pips/day- EVERY DAY
  • or for that matter 20pips/trade EVERY TRADE - (anybody who tells you that in our experience is simply lying).

    Just like humans (since trading is nothing but collective human behaviour) - best of the trading systems will have a few "bad hair days".

    You can find and even create a few that will generate a bit more once or twice a week. That's the reality.

    Please note: The above example is just that - an example. Its better to come up with your own rules (maybe only 1% of your capital, keep the trade longer/lesser than 2 sessions etc) - based on your capital, time dedicated to trading etc. read our disclaimer

    Here are few places on the web - Forex Forums - where users post their trading systems. (Forexopia.com does not endorse any of them) These links are provided as a courtesy.
    In closing: every one of us has had atleast one-successful trade. Many of us spend way too much time figuring out BAD trades - when we should spend double the time figuring out GOOD trades - what did I do that made me profit? - what were the settings? - can I replicate the same results?.

    If you can replicate any of your successful trades 7 times out of 10. You have a trading system. Period.

    Go. Figure out your good trades.



      Forex lessons in Creating your trading system Forex Trading
  • What is a trading system
  • »  Steps to create your trading system
  • Testing your trading system
  • Following your system
  • Trading systems on the web
  • Basic Curreny Trading Lessons
  • History of Forex
  • Introduction to Forex
  • Opening a Demo Account
  • Entries and Exits
  • Market Players
  • Intermediate FX Trading Lessons
  • Reading Charts
  • Charting Tools
  • Chart Patterns
  • Indicators and Oscillators
  • Creating your own Trading System
  • Advanced Forex Trading Lessons
  • Money Management
  • Find your comfort zone
  • Choose your primary analysis
  • Disciplined trader
  • Enter the dragon
  • Forex Newsletter (delivered bi-weekly)

    Please enter your email below to sign up for Forexopia's weekly newsletter. There's absolutely no cost or obligation, and it's risk free because you can easily unsubscribe at any time - although you probably won't want to!

     Copyright © 2006 - 2010 Forexopia.com  Visit other Network sites: 


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