Forex trading systems is a term traders come across all the time. In fact, you are almost certain to hear the phrase ‘stick to one trading system.’ So what are forex trading systems and how do you get one for yourself.
To begin with, forex trading systems can be defined as a set of expert advisors or indicators that form a system, which helps you make trading decisions. These trading systems can be either fully automated, making use of expert advisors or can be a set of indicators that give you the buy and sell signals along with trade entry and exit points (in some advanced systems).
Do you need a forex trading system?
The answer is yes and its quite simple. Take for example if you were trading based on Moving average signals. This is nothing but a trading system, or the fancier term could be an MA based trading system.
So yes, every trader will opt for a trading system, irrespective of whether it is an expert advisor or a moving average or any other kind of forex indicators.
How to build a forex trading system
Now that you have a fair idea of what a forex trading system, the next obvious question is how to get started with a trading system.
Popular trading platforms such as MT4 usually come with a lot of default indicators, custom indicators and expert advisors.
To choose a trading system right for you, you need to first figure out what time frame charts you will be trading. This is essential because the parameters you enter while attaching an indicator or an EA plays an important role. It is usually recommended to use a 1 Hour chart or higher and use a 15 minute chart for signal confirmations.
Once you choose a time frame for your chart, the next option is to build your trading system. Most often traders tend to make use of the same kind of indicators if your trading system is manual.
For example, we know that indicators are basically categorized into leading and lagging indicators and then sub classified into momentum, volatility, trend and volume. So if you were to use two momentum indicators, it does not add any value considering that one of them will be mostly redundant as it would basically give the same signal.
On the other hand, mixing a momentum indicator with an oscillator can help to reconfirm your trade signals from two different aspects, thus making your trading system much stronger.
Forex Expert Advisors as a trading system
Forex EA’s are basically developed based on some present formulae. For example, the most simple would be to trigger an order during MACD cross-overs. The popularity for forex expert advisors basically is because of little to no intervention which is quite convenient for traders who are unable to dedicate time to monitor their trades in real time.
However, more than 50% of forex EA’s tend to lose money and this is because of incorrect settings and/or setting optimistic Stop losses and take profits, not to forget the position size (lots) as well. Improper risk management can lead to an EA easily wiping out your trading balance.
With forex expert advisors, traders tend to look at the bigger picture than the fine details. For example it is easy to get tempted by a EA trading system that shows a 20% gain every few months, but when you decipher the gains to a monthly basis the results aren’t that exciting.
Forex trading systems – Best Approach
The best way to test drive and get familiar with a trading system is to run it on a demo account for a considerable period of time. By making sure that the account capital on the demo account reflects your actual trading balance will give you a better idea on managing your trading system risks.
Pay attention to factors such as market volatility and the trading hours your trading system is most profitable at.
After testing your trading system on a demo account, if you wish to play it even more safe, run it on a micro or a cent account to gauge the performance before taking it live onto your existing trading account. To conclude, no matter how well you fine tune your trading system, it should follow the common saying, “let the fundamentals drive your trading system and let the technicals execute your trades“