Having a mechanical trading system is helpful because it makes signals that a trader should take later. You can search for some on the internet and pay, but you can also create your own. If you pick the latter, you are in the right place because that is what we will talk about today. To make your own trading system is one and testing it is another.
Which type of trader are you?
Name which type of trading you prefer. Next, you should be able to know how much time you can dedicate to trading. Know how patient you are when it comes to trades. Once you can answer these, you will know which time frame you can use.
The goals of your trading system
If you decide to make your own trading system, one of the two goals you should have must be early detection of trends. Indicators such as moving averages are the ones that can make this possible. It is one of the most famous and most accessible indicators to use out there, but there are other options that you can check.
The second goal is to avoid getting whipsawed. In layman’s terms, your system should be able to tell you whether the trend is real or a fake-out. So, we need to use another indicator that confirms the signal for a new trend. Some examples include MACD, stochastic oscillator, and RSI.
Even though you are excited about how much profit you can make after winning, it is also essential to recognize the possibilities of losses. Name or estimate a price that you can accept to lose in every trade.
Entry and exit
Some are brave enough to enter the trade even when the candle did not close yet if their indicators already match and give good signals. However, some don’t mind waiting for the close of the candle because there is still so much that can happen. There is still a possibility of reverse.
In terms of exiting, you can trail your stop. If the price movement favors you by X amount, you now move your stop by X amount. You can also set an exit target. For the calculation, you can make resistance and support as targets or others that you prefer.
Discipline is the key.
Your hard work in making a trading system must not end up in vain. You made that system for a reason, and you should be disciplined enough to follow it. So please take note of everything and stick with it regardless of the market situation.
Testing the system
Find a charting software package to test your system. This charting software should let you go back or move forward one candle at a time. You need this kind of software so you can stick with the rules you have created. Please note your trading record to see where you went wrong to correct them and see your progress. Once you are comfortable with your system, you can use a demo account for a month or two to practice. Then, when you are confident enough, you can start trading in the live forex market.