Have you ever found yourself unable to place a trade simply because you consecutively lost the last 2, 3 or maybe even 10 trades you took?
Do emotions such as greed and fear negatively affect your forex trading performance over and over again?
Then guess what…?
A Mechanical Forex Trading System is exactly what you need!
In today’s blog post,
I’m going to be walking you through a Simple 6 – Step Blueprint you’ll need to follow in order to create Powerful Forex Trading Systems from scratch!
Now…
Even though it wouldn’t take you too long to create a promising forex trading system, you’re going to need to test it extensively if you will like to filter the profitable ones from the non – profitable ones, so please be patient.
In the end,
… A profitable forex trading system could potentially make you loads of money, so it’s totally worth the wait.
Now with that out of the way, let’s dive right into the meat and potatoes of today’s Step -By – Step Blueprint, shall we?
What Is A Forex Trading System?
Well…
For those of you who’ve got absolutely no clue about what a forex trading system actually is, let me break it down for ya!
You see,
A forex trading system is a method of trading the forex markets which is upon a series of steps which are suppose to help a trader to determine whether or not to buy or sell a forex currency pair at any given point in time.
Now…
It is possible for a forex trading system to derive its forex trading signals using technical analysis charting tools or fundamental news-based events.
However, for the typical average forex trader,
… a forex trading system is usually going to consist of signals from technical indicators which are suppose to give trade alerts for buy or sell trading decisions which have historically led to profitable trades.
Mechanical vs. Discretionary Forex Trading Systems
Generally speaking, there are two basic types of forex trading systems. There is the mechanical forex trading system and Discretionary forex trading system.
So What is a Mechanical Forex Trading System?
A mechanical forex trading system refers to that type of trading methodology which is purely based off of a systematic approach to spot forex trading.
The trading signals which you’ll get from mechanical forex trading systems are mainly going to be based off of technical analysis which usually prompts forex traders to do X when Y happens for example.
Okay, What About Discretionary Forex Trading Systems?
A Discretionary forex trading system on the other hand, refers to that type of trading methodology which depends on the use of a trader’s experience, intuition or judgment to determine trade entry and exit levels.
Now…
Since Mechanical Forex Trading Systems are much more Newbie – Friendly and easier to create, let me quickly walk you through the Proven 6 – Step Process you’ll need to follow to create one for yourself, from scratch!
Step #1 | Timeframe Selection
Contrary to what most rookie forex traders might think, defining the trade entry and exit rules for a mechanical forex trading system should not be on the top of your forex trading system’s development priority list, at all!
The first thing you’re suppose to do is to decide what kind of forex trading style suits your personality and schedule first.
Ask yourself this question…
Am I a Day Trader or a Swing Trader?
Taking the time and effort to decide on a forex trading style is going to help you immensely when you go on to choose the timeframe which you’re going to be looking for trade setups on, using your mechanical forex trading system.
It wouldn’t make sense for you to trade the daily timeframe if your current schedule gives you a ton of free time to dedicate to trading the markets.
In the same vain,
If you can only spare an hour a day to trade the markets, trading the lower timeframe charts as a scalper or a day trader might be more suitable for you.
I hope you get my point.
Even if you’re going to be using Multiple Timeframe Analysis in your forex trading system, deciding on an anchor timeframe which you’re going to be spending the most amount of time looking for trade setups on is really crucial.
Step #2 | Choose Your Preferred Trend Identification Indicator
If you’re going to be building a trend following, mechanical forex trading system, then you’re probably going to be faced with the option to choose a technical indicator which will help you to identify trends as soon as possible.
Now…
Although there are lots of technical indicators which are designed to help you to identify trends within the markets the most common and the simplest of them all is the Moving Average indicator.
The most basic method which traders commonly use to identify trends using moving average indicator is the “Moving Average Crossover” system.
So what is the “Moving Average Crossover” System?
Well,
The Moving Average Crossover system refers to any forex trading system which gives forex traders buy or sell signals whenever one or more moving averages crosses either above or below some other moving average on a price chart.
A typical Moving Average Crossover system is usually made up of two moving average (one fast moving average and one slow moving average).
When the fast moving average crosses above or below the slow moving average, traders would consider that as a signal to either buy or sell a currency pair.
The moving average crossover is one of the fastest methods for identifying a trend and it’s also one of the easiest methods for finding new trends.
Of course,
… there are many other technical indicators and methods for identifying trends in the markets but I chose to show you the Moving Average Crossover as an example because its one of the fastest to work with and easiest to use.
Step #3 | Choose your Preferred Method for Confirming the Trend’s Direction
The second goal for your trend following, mechanical forex trading system should be to have some sort of the ability or mechanism for avoiding whipsaws.
This simply means that your forex trading system should define some technique which should help you to stay away from “false trends” in price action which aren’t backed by a strong momentum within the markets.
The simple way to do this is to look for the confirmation of other technical indicators or to use trading techniques like Multiple Timeframe Analysis to confirm the direction of the market’s prevalent trend.
If you want, you could have a look at this trend following, forex trading strategy to see exactly how I use Multiple Timeframe Analysis to confirm the profitability of trends within the spot forex markets.
Step #4 | Pick Your Maximum Risk Per Trade
Lots and lots of rookie forex traders hate to talk about making the necessary preparations which would protect them from the negative effects of mismanaged trading losses.
However,
Smart forex traders tend to worry more about what they could potentially lose before they even think about how much money they’re likely going to make from each trading position they decide to take.
And this is why it is extremely important for you to define what percentage of your forex trading capital you’re willing to risk on each trade you’ll take.
The exact amount you might be willing to lose on the trades you take is going to be different from that of everyone else since this amount is usually subject to the size of your forex trading account and the level of your risk tolerance.
Just bear in mind that whatever number you decide on should give your trades enough room to breathe without making you risk too much.
PRO TIP: You should always calculate how much money you could potentially lose on every forex trading position before you get excited about how much money you’re potentially going to make from it, Always!
Step #5 | Define the Trade Entry and Exit Rules For Your Forex Trading System
I’m pretty sure this is the part that you’ve all been waiting for.
Okay…
Once you’ve defined the total amount you’re willing to risk on each trading position you’re going to take, the next step in the forex trading systems’ development process is to define your trade entry and exit rules.
An Example of a Simple Trade Entry Rule
In the chart below,
… you’ll notice that the trade entry rule for my simple moving average crossover forex trading system is;
- To go ‘Long’ when the fast moving average crosses above the slow one
- To go ‘Short’ when the fast moving average crosses below the slow one
Moving Average Crossover System | Long Trade Entry Signal Example
Moving Average Crossover System | Short Trade Entry Signal Example
Note that this MA Crossover Forex Trading System waits for the candle which is formed right after the moving average crossover to close before giving you the green light to get into the markets with a forex trading position.
However,
You’re going to come across forex trading systems which would tell you to enter into the market with a trade as soon as you get the signal to do so without waiting for the close of any candlestick to close.
In the end, this simply boils down to a matter of preference among traders.
Personally,
I usually like to wait for the close of a candlestick before taking a trade simply because I’ve found myself in situations where all of the indicators I use will agree upon a trading signal during in the middle of the candlestick’s formation,
… only for me to find that everything reverse against me by the time that same candlestick reaches it close.
My two cents!
An Example of a Simple Trade Exit Rule
For trade exits, we’re going to be getting out of the markets when price crosses and closes either above or below the slow simple moving average for this particular moving crossover forex trading system.
As you can see in the image below,
Moving Average Crossover | Long Trade Exit Signal Example
This is just an example of one trade – exit method but there are actually quite a few other trade exit strategy options you could choose to use.
One way to exit an open forex trading position incorporates the use of a trailing your stop loss order.
This simply means that if the price were to move in your favor by ‘X’ pips, you’re going to move your stop loss by ‘X’ pips as well.
Another way to exit a trade is to have a set fixed profit target and exit when price hits that target.
How you choose to calculate that profit target is totally up to you.
For example, some forex traders might choose to use support and resistance price levels as their profit targets.
Feel free to use whatever method you find more appealing.
Step #6 | Write Down Your Forex Trading System’s Rules and Follow them Religiously!
This is arguably the most important part of creating your very own forex trading system. You’re going to need to write down all of the rules of your forex trading system and follow them.
Always!
And since discipline is one of the most important characteristic which a trader needs to posses in order to become profitable, you will need to strictly follow the rules of your forex trading system through thick and thin.
No forex trading system is ever going to work for you if you do not stick to its rules at all.
In Conclusion…
You’re probably going to come across a ton of mechanical forex trading systems that work all over the internet but the thing is, lots of forex traders lack the discipline to diligently follow the rules of these forex trading systems.
As a result of this, these traders still end up losing their hard – earned money, please don’t be like them.
Once you’re able to build or find a mechanical forex trading system which is designed to;
- Help you Identify new and established trends within the markets
- Help you to filter out false trends which lead to whipsaws
You’re golden!
Trade the markets with your system on a demo account for at least 6 months. That should help you to get an idea of the system’s performance under live market conditions.
If you’re able to turn a profit trading with that mechanical forex trading system on a demo account after 6 months, then feel free to upgrade to trading with it on a live forex trading account using real money.
Just remember to always stick to the rules of your trading system, Okay?
I really hope you enjoyed reading this guide as much as I enjoyed writing it!
Now tell me something,
Are you going to be trading the forex markets using a mechanical forex trading system which you will create from scratch following the steps in this guide?
Or
Are you going to search the internet to find one which has already been proven to work such as this, trend following, forex trading strategy?
I’ll really love to hear your thoughts on this in the comments sections.