Step 1: Time interval
The first thing you need to decide when creating your system operations is to know what kind of trader you want to be. You want to be operator 1 day or 1 hour? Graphics you like to see every day, every week, every month or even every year?
How long you want to keep your open positions ?.
Answering these questions will help you determine what time interval used in your operations. Although similarly will use many types of graphs with different periods of time, this will be your main interval, which will use when searching for signals to open or close positions.
Step 2: Choose indicators that help identify a new trend
Since one of our goals is to identify trends as soon as possible, we use technical indicators that can achieve this. Moving averages are one of the most popular indicators that traders use to identify trends. Specifically, two moving averages (one slow and one fast) are used and waits for the quick crossing above or below the slow. This is the basis for what is known as “moving averages crossed system”.
In its simplest form, they crossed moving averages are the fastest way to identify trends.
Of course, there are many other ways in which operators can find trends, but moving averages are crossed one of the easiest ways to achieve this.
Step 3: Find indicators that confirm the trend
Our second objective for the operating system is that it has the ability to avoid false signals and avoid falling into false trends. The way to do this is by making sure that when we see a sign of a new trend, we can confirm it using other indicators.
There are many good indicators for confirming trends, such as: MACD, Stochastic and RSI.
As you feel more familiar with the indicators, you will find some who will prefer over others and you can incorporate them into your system.
Step 4: Define the risk
In developing the system it is very important to define terms are willing to lose on each trade. A few like to talk about losing, but in reality, a good operator thinks first of what may eventually lose before thinking about how much you can win.
The amount of money you’re willing to lose is different in each person. You have to decide how much space is enough to allow your operations breathe, but at the same time not risking too much in a single operation. In later lessons will explain better money management. Money management plays a big role in the risk you should give each operation.
Step 5: Define inputs and outputs
Once you have defined as those willing to lose on a trade, the next step is to find out where to place the closure of an operation to get the best profit.
Some people like to get as quickly as possible in a trend when indicators give a good sign, even if the candle has not closed. Others, like waiting until the close of the candle.
In my experience I have found it better to wait for the fire closure before making an entry. I have been in many situations where I am in the midst of the fire and all my indicators fit, only to discover that the closure of the fire, the operation turned against me.
It is really only a trading style. Certain people are more aggressive than others and eventually going to realize what kind of trader you are.
For closures or outputs, there are different options. One way to make a closure is to place a stop loss, this means that if the price moves in your favor for “X” amount, move the stop loss for that “X” amount.
Another way is to determine a level, and exit when the price reaches that level. How to calculate that level, it depends on you. Some people choose support and resistance levels for it. Others, just choose the same number of pips on each trade. Anyway, calculate the level is up to you, just make sure you hang on to it. No matter what happens, never leave earlier. Stay attached to your system, after all, what you developed YOU!
Another way out is to have a criterion that a signal will let you out. For example, you can create a rule that when your indicators are returned at a certain level, you leave the operation.
Step 6: Write your system rules and stick to them!
This is the most important when creating your operating system step. You must write the rules of your operating system and always follow them. Discipline is the most important feature that a Forex trader must have, so stay always attached to your system! No system will work for you if you do not follow their gunwales, so remember to be disciplined!
How to test your system
The fastest way to test your system is to find a graphics software where can you back in time and move the chart following a candle at a time. When you move the chart by following a candle at a time, you can follow the rules of your operating system and make your operations accordingly. Save the history of your operations and be honest with yourself.
Save gains, losses, average earnings and losses. If you are happy with the results, then you can follow in the next step to test your trading system: trading live on a demo account.
Test your system live on a demo account for at least two months. This will give you an idea of how you can operate your system when the market moves. You must believe that there is a big difference when operas live, that when you only do tests.
After two months of live trading with a demo account, you can tell if your system is reliable for the market. If you’re still having good results, you can test your system in a real account. At this point, you should feel very confident and comfortable with your system to open operations without hesitation. At this point, you’ve done it!