Forex trading systems: 5 questions to ask
To succeed as a trader, you need a trading system or a strategy that will help you in making decisions. The system can either be automated or manual. An automated system is built using algorithms that do the hard work for you. They crawl the markets and find opportunities based on the parameters you have chosen.
A manual strategy, however, does not use algorithms. Instead, you need to look at the market and make decisions based on the market conditions and the technical indicators. To develop either strategy, you need to ask yourself five key questions.
What market to buy or sell?
In the financial markets, there are many markets you can trade in. For example, if you prefer trading currencies, you might decide to focus on currencies from the emerging markets, or currencies from developed countries. If you prefer trading commodities, you might decide to specialize in energy commodities like oil and gas. Similarly, if you prefer stocks, you might decide on technology companies from the US, or retailers from the UK, for example.
In other words, when developing a system, you need to choose the markets it will trade in, because the markets mentioned above all trade differently. For example, the forex market is open 24 hours, the stock market is opened for a few hours during the day.
How much to buy or sell?
The lot size of the volumes you decide to trade in are very important. Higher volumes can give you more profits, but they can also lead to substantial losses if the market moves against you. To solve this problem, you must find a balance between opening small trades that will probably be unprofitable, and large trades that will expose you to more risks.
When to buy or sell a market?
The main role of the system is to help you know when to buy or sell. With an automated system, it will open and close trades when a combination of parameters are met. For example, you might develop a system that opens buy trades when the relative strength index reaches the oversold position of 20. You might also develop a system that initiates a sell trade when there is a crossover between longer-term moving averages and shorter-term ones. This is a stage where you must spend a lot of time, because it will determine how successful your strategy is. Ideally, you should spend a lot of time testing the system to ensure that these rules work.
When to exit a losing position?
All trading systems have one thing in common; they are not always successful. Therefore, the system must have an effecive way of exiting a losing position. A good way to do this is to incorporate a stop loss in the trading system. A stop loss is a tool that automatically stops a losing trade when it reaches a specific level. There are different ways to create a stop loss position but the most common one is the risk-reward ratio. A risk-reward ratio of 1:2 means that, for two dollars that you make, you are comfortable losing one. A more detailed way of using a risk-reward ratio is to incorporate the overall winning and losing ratio of the system.
When to exit a winning position?
Finally, you must ask yourself how your system will choose when to exit a winning position. A common problem among new traders is to keep a winning trade for a long time. This increases the chances of a reversal happening. Therefore, the system must always have a method to choose when you will exit a winning trade. This question can be addressed by using a take profit tool. This automatically stops a trade when a pre-determined price level is reached. This level should be specified based on the risk-reward ratio that you use.Conclusion
Developing an automated trading system is difficult, especially if you don’t have skills in programming. To help you with this, you can use the templates provided in Metatrader software, which is available from brokers such as easyMarkets. You can also buy a pre-made system from the Metatrader online community. Before you use a trading system with real money, it is recommended that you test it with a demo account first.