Guidelines to creating own Forex trading system
Submitted by Edward Revy on January 27, 2007 - 18:49.
There are several things we want to achieve when creating Forex trading system:
1. Find entry points as early as possible.
2. Find exit points securing maximum gains.
3. Avoid fake entry and exit signals.
If accomplished, these three goals will yield a profitable trading system.
So, where to start from?
Choosing your Time Frame
This is the first step, where you will need to answer yourself: how many hours you want to dedicate to trading? Would you prefer sitting in front of the monitor constantly for several hours trading short (5, 15, 30 minutes) time frames that would require constant market monitoring and quick reaction to price moves OR you would be more comfortable with setting up your charts once or twice a day and never turn your monitor on during the rest of the time?
This is pretty much about the comfort and free time you have on your hands that could be spend in the Forex currency world, however, while testing your new strategies you may want to find out about their performance in different time frames and then choose the most accurate and profitable option.
Choosing Trading Tools
There are plenty of trading tools and indicators available to Forex traders, but not all of them could give the fastest signal about upcoming trading opportunities. And traders’ goal, of course, is to get into the trade as early as possible and take maximum advantage of price moves.
Among indicators that could provide traders with a fast signal about upcoming changes and possible trading opportunities are such indicators as EMA (Exponential Moving Average), SMA (Simple Moving Average), Parabolic SAR; Fast, Slow or Full Stochastic, MACD and others. The key moment here is to fully understand the principles of their work to be able to take maximum advantage of signals those indicators produce.
One of the common ways to spot a trend reversal as fast as possible is to use Moving Averages. Such simple strategy as using 5 EMA and 10 EMA crossover will show trend reversal and new trading opportunity at its earliest stage.
Another example would be Stochastic lines crossover or MACD lines crossover. The idea behind it is simple: when two line cross each other the trend is changing to the opposite and new opportunity for entry arises. Stochastic and MACD indicators also use moving averages.
Combining indicators on the one chart and experimenting with indicators values, traders can create an optimal and the fastest way to spot the early trading opportunities.
Choosing a currency pair and finding its active trading hours
Currencies have their own “characters” or behavior. Some are extremely active like GBP/USD or GBP/CHF, some are quite consistent and steady trending like EUR/JPY or EUR/GBP.
Different indicator set-ups, different values may be used to achieve best results for each currency pair.
Also a good idea is to find the most active hours for a chosen currency pair. Those hours of currency highest activity are easy to spot on the chart and should be used to get maximum profits during the trading session.
Choosing additional trading tools to confirm signals received earlier
Once we found time frame, indicators and currency pair(s) that respond the best it is time for the most crucial step — finding additional tools/indicators that will confirm received earlier signals and give either a green light for action or save Trader from fake-outs.
As a confirmation indicator Trader can use again any indicator or trading tool he/she is well familiar with. It is recommended to be more sophisticated in choosing additional tool to confirm the prior signal. It could be also the same indicator but with different settings.
For example, with our initial 5 EMA and 10 EMA crossover method we could use additional 20 EMA line and wait until 5 EMA crosses 10 EMA (which is the first signal) and continues through 20 EMA (which would be our confirmation for action).
Or instead, we could opt for MACD indicator – it is a very good Forex indicator that can reveal a lot of useful information. Finding the best working value set-up for MACD (it has initial settings are (12, 26, 9) ) that will perfectly match our time frame and particular currency behavior we can use it as a great confirmation indicator to separate most promising trades from fake, loosing ones.
Other good indicators/tools to confirm the signals are RSI, Stochastic, Fibonacci etc. Improvising and learning Trader can find the one that produce best results.
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