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Steps to create your trading system |
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 Terms | In Trading Terms | | | 1 | Most 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 | | 2 | You 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 | | 3 | Did you figure out an approx time to reach there? | How long will you hold your position to reach this PROFIT-goal? | Time | | 4 | Did 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 | | 5 | Did 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.- Capital = no more than 2% (or max 5%) of your capital should be dedicated to any single trade.
- Goal = should always be in PIPS (not $$$)
- Time = should be sessions/days
- News = look out for those road-blocks/construction areas - NEWS changes everything
- 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
| Rules | Personalized | Outcome | | 1 | Capital | Let'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 | | 2 | Goal | Since we are trading eur/usd which has an average daily range of 75 pips. Let's aim for 20 pips/day | 20 pips X $4/pip = $80/trade | | 3 | Time | 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. | | 4 | News | Most 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. |
| 5 | Quit | This 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 |
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