Hi traders, today I want to talk to you about what a Successful Forex Trading System is all about!
As shown in the graphic below, a good strategy is a structure built on some critical foundations.
When creating a forex trading system, it must be supported by an accurate entry strategy and a detailed trade management plan. You'll need rigid risk management guidelines, implementation of practical tools, and a comprehensive trading plan. By the end of this article, you have everything you need to be able to develop your own forex trading system.
If you're just getting into forex, not to worry. You may be interested in our How to Trade Forex for Beginner's Guide.
Creating A Forex Trading System Entry Strategy:
The entry strategy is critical to the success of a system. The entry strategy, above all else, must put you in a position to make a profit. It is the entry strategy that decides at what point and for what reason you are going to risk your hard-earned dollars, so you must be confident in it!
Again, the most important element of an Entry Strategy is to set yourself up for success and give yourself profit potential. Your entry strategy does not need to be perfect. It only needs to give your system a chance to make consistent profits.
A common entry strategy with a great system around it is better than a great entry strategy with no system around it!
Your trade management strategy describes how you will handle a trade after making the entry. The most important part of your Trade Management strategy is having it written out in your plan. You must know how you are going to handle the trade ahead of time so that you are not making rash, emotional decisions with money on the line.
Emotions are probably the most complicated aspect of developing your plan because there are so many things to consider when you have a live trade in the market. Here are just a few of the possibilities that you need to have a plan for before you ever take the trade:
- Is there a hard profit target?
- Is there a trailing stop?
- What system do you use to trail the stop?
- When does the trailing stop kick in?
- Do you take partial profit?
- How much profit do you take?
- When do you take partial profit?
- How many times do you take partial profit?
- Is there a point where you would add to the trade?
- Will you add if it is winning or losing?
- At what percent of winning or losing will you add?
- How much will you add?
- Is there a point where you would add a hedged position?
- When would you add a hedged position?
- How much of a hedged position would you add?
- Should you ever pull the entire trade off before it hits a stop or target?
- How do you handle the trade if the news is coming out?
- How do you manage the trade if other trades are in play?
- Do you leave your trading station with a live trade on?
- How do you set up a live trade if you are leaving or going to bed?
- How do you handle a trade if it is struggling at support or resistance?
- What do you do if you accidentally enter an incorrect size on the trade?
- How long will you hold a trade if it is floating around the same price?
- Will you take an entry on a pair if you are already in the same direction on a correlating pair?
- How many trades will you take on at once?
- Will you hold a trade over the weekend?
- Will you keep trades that earning negative interest in your account?
- How long will you hold a trade that is receiving a negative swap?
- What if there is a signal, according to your entry rules, in the opposite direction before you get out of the trade?
All of these things and a lot more are things that a trader could do with a live trade in play, and all of them should be planned beforehand of time with a strict set of guidelines. If any of these things apply to how you would manage your trade, you should have a detailed plan written out as to how you execute the management strategy.
Hopefully, that gives you an idea of how to implement your trade management strategy.
Risk management is vital to successful trading in any way. There will be no way to create the best forex strategy system unless you have a solid risk management plan.
Your risk management plan is your guide to exactly how much money you will put on the line for a given trade.
It will be impossible for you to make money on any consistent basis without a solid risk management plan in place. You can't build on capital until you master preserving capital.
Consistency in your risk management is critical to your success. Risking different amounts of money on various trades (without a strategic reason for doing so) is a simple way to get yourself in trouble.
For instance, something that many beginner traders struggle with is increasing the size of their trade only because they are hoping to make more money.
Increasing trade size is a recipe for disaster because it means that there is no logical way for their system to be profitable. They may have won a lot of trades, but if they lose on one where their risk is out of control, they'll be at a net loss regardless of their track record.
Remember, trading is about math. If you win five trades at a 1/1 Risk to Reward ratio and are risking 1% per trade, and you made 5%, that's great. But what you have to guard yourself against doing is then deciding to risk 2%. If you lose three trades, you are at a net loss even though you want the majority of your trades at a 1:1 ratio.
Trading is hard enough as it is. You can't afford to handicap yourself by not being consistent. You'll lose money even when you are trading well!
One of the most frustrating things about trading is that even when you are making good trades, it doesn't mean you are making money. You can be up hundreds of pips and still be losing money if you are not managing your risk well. This is why being consistent with your risk management strategy is so important.
Forex Indicators & Tools:
A trader's tools are a critical part of his success.
The success of free forex systems that work requires you to use what you have effectively, and that certainly includes the implementation of tools. Depending on your particular strategy, the tools you use may be very different than another successful trader. What's important is that you are using the instruments to increase profitability.
Your tools may consist of your trading platform, your computer with multiple monitors, signal software or alerts, indicators, a trading mentor, etc.
There are a host of tools out there that you can use to your benefit. However, one must always be careful not to over-complicate the system with all that is out there. One of the most common things we see are traders who over-complicate things by trying to incorporate every tool out there.
What's important to understand is that, although there are thousands of tools out there that could potentially benefit, they are not all necessarily going to work in conjunction with your strategy or with one another.
In my opinion, it is important to have a few critical tools that you are comfortable and confident with that can help you become a more profitable trader.
Find forex tools here: https://tradingstrategyguides.com/free-tools/
Hopefully, that gives you an idea of what a useful tool is and how it can benefit your trading system.
Your plan is what ties all of these things together. Without a plan to execute your entry strategy, risk management or money management there is no way you will be successful. Click here to view a trading plan template.
Your plan should include a very detailed set of directions for exactly how all of the components tie together.
Not only should your plan include the steps for execution of the different aspects of your system, but it should also list your goals. Detail, in your plan, what you wish to accomplish by successfully executing your trading system.
Again, the plan is what puts all of these components together and sets you up for success. The indication of a great plan knows that if you follow it, you will succeed!
I hope you guys enjoyed this article. I would appreciate feedback in the comment section and shares on Twitter and Facebook.
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