Note: This is a guest post by Casey Stubbs of Winners Edge Trading.
When creating a Forex Trading System, it is important to develop a system that will contain all the necessary components to master the market, and earn a reasonable profit margin.
If you want to develop a successful program you should include 5 key elements, which are: an entry program, trade management, risk management, tools, and an execution plan, all of which will help you excel, and put you in a position to earn the highest profit margins possible.
Regardless of what stocks you buy, what world markets you choose to trade with, or what companies and currencies you are dealing with, these are the basics to any good trading system you develop.
This is critical if you want to succeed in Forex; it is basically a strategy that if designed properly can give you a huge edge in trading the foreign exchange markets. It will help you decide when and where to enter the trade.
You have to set your charts up properly, and find the best methods to place this entry to the market; and, although it does not have to be perfect, it has to put you in a place where you have a chance of earning high profits.
The Entry Point
The entry point can sometimes falsely be called a strategy, I say falsely because a strategy is more than an entry point and that is why this article is about the entire portion which is more accurately called a Forex trading system. One other important point about your entry position is that you will want to make it clear and easy to identify so that you do not have any confusion.
It is also easier to keep your charts clear of excess lines and indicators. It is also helpful to conduct Forex Back Testing.
This is the second piece of the puzzle. It basically entails how you are going to work and deal with certain trades, once you have entered the trade. You have to include this in your Forex trading system plan; you must determine exactly how each trade will be managed, to ensure you know what to do when every possible type of trading situation turns up.
It will also help you avoid making rash decisions, which can cost you in the long run. There are dozens of considerations you have to make, possibly making this the toughest part of your strategy to develop.
Some of the many inquiries you have to ask include:
- How much profit should you take?
- Where do you take profit?
- Where do you place your stop?
- Should you add, and when should you add, a hedged position?
- Which percentage level of wins (or losses) should you add?
- How often should you take partial profits?
- How much will you add?
- Should you move your stop loss to break even?
- Should you take profit early?
When you take the time to figure out all of these questions that should be asked, you are ensuring that you are making the right decisions when you trade. With a great Forex Trading System in place, you are going to have several solutions to these complex questions.
But, you must plan ahead, in order to ensure you are making the right decision, rather than simply jumping into something you did not plan for.
Risk Management is critical to a great Forex Trading System, and will basically answer the question:
How much are you willing to put in for any one trade?
You have to be consistent in this part of the plan. It is not as simple as choosing an arbitrary amount because there are many factors to consider. You need some consistency in the amounts you will risk, because there should be an order to your plan. And, if you are willing to risk more on certain trades you need to lay out the reasons why, such as double support zones or trend continuation areas.
You can't just say you are going to risk more, because you want to make more money. There has to be some thought out plan, and you have to put in the effort to make this work. You want to keep most of your trades at a 1:1 ratio; you can't simply risk more because you have lost money on a couple of trades, and hope to win it back on one big investment.
This might work once or twice, but over time, will prove to truly hurt your chances of succeeding in Forex.
With any great Forex trading system, you should make use of the tools that are available (and there are plenty), to help you to succeed. Each trader is different, and therefore each system is going to call for the use of different tools. A trade platform, using a few computers, including software programs providing you signals, or even consulting a trade mentor, might all be part of the tools you will use.
Regardless of what you use, you shouldn't make it too complicated; using what is available, rather than trying to create your own tools, will truly help you, rather than put you in a position to add a burden upon you. There are many tools to use, but you have to make sure you are only using the ones that work with your set system.
A great Forex Trading System is going to guide you, and will make use of a series of tools to help you excel when trading.
The Trading Plan
The fifth, and final factor to look for in a good Forex Trading System, is the plan. This is basically going to bring everything together.
If you do not have a cohesive plan in place, all of the tools, signal software, and other programs you can purchase, are not going to mean a thing. You have to make this detailed, and you have to lay everything out on paper, in order to ensure it is something you will stick with and can follow at all times.
You must include steps, how and when to execute, the many aspects of your trading system, and any set goals you might have in mind, when you are trading on the Forex market. This has to be laid out, it is the only way you will stay on track, and is the only set of rules you will need to follow, in order to make the Forex Trading System work in your favor.
You need all of these things to ensure an effective Forex Trading System is created. Regardless of how perfect the system is, there is always a potential for loss, and you will lose some money when trading. The main thing to consider is staying on plan, following your set plan, and following this guide, so you can get back on track, and start pulling in the highest profit margins possible when you are making trades in Forex.