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5 Steps for Successful Creation of a Trading System

June 21, 2017 16:16

Dear Traders,

Creating a good and proven trading system is not an easy job. Different Forex strategies try to predict future prices on the basis of past developments. I call it "Historical vs. Now moment" concept.

I will explain some of the basic concepts behind different Forex strategies and attempt to summarise the main tools used by traders in breaking down price patterns.

Traders usually come to me with these questions:

  1. How do you make money from forex trading?
  2. Is it possible to be successful using technical indicators only?
  3. What are the best technical indicators for successful trading?
  4. Can you tell us the most predictive and successful indicators for day trading?
  5. Could you teach us high probability trading strategy system?

Creating a system that is based on indicators is different from price action trading. Forex systems that are created with different indicators can be used successfully if a trader knows how to interpret them. Too much information might cause so called "paralysis by analysis" which can keep you from making trading decisions that are actually profitable. Beginners should know once and for all that there is no best trading system in the world. The system only helps us stack the odds in our favour and make profitable decisions.

Almost every trading platform comes with a host of indicators that those who engage in technical trading may find useful. You simply apply any of them to your chart, with the system performing calculations based on the past price, current price, and volume.

Define Your Dimension in Trading

Trading consists of different styles that I call "dimensions". You as a trader need to choose which styles you're more comfortable with. Whatever dimension you choose, rest assured that knowing price action will complement all styles of trading. We can classify Forex trading dimensions as:

  1. Price Action
  2. Price Action and Indicators combined
  3. Pure Indicator
  4. Harmonic Patterns
  5. Renko
  6. Range bars
  7. VSA (Volume Spread Analysis)
  8. Point and Figure.

Define a Timeframe for Your System

When you choose which dimension you will trade in, it is time to choose the appropriate timeframe. Timeframes are generally divided as:

  1. Long term investing – Monthly
  2. Mid to Long term trading – Weekly
  3. Swing trading – Daily
  4. Intra week Swing trading – H4
  5. Intraday trading – M30-H1
  6. Scalp Swings – M15
  7. Scalping – M5-M15
  8. Extreme Scalping – M1
  9. MTF (Multiple TImeframe Approach) – H4 H1 M30 or different combination.

Pick the Proper Indicators

Very often you will come across a system that has dozens of indicators cluttered on the screen. I must say, that is a completely wrong approach. The more indicators you have, the more issues you run into with you MT4.

The main purpose of Forex indicators is to:

  1. define a trend
  2. confirm a trend and entry
  3. place SL and TP.

If you clutter your charts with too many indicators, how will you define the trend, entry and targets? Different indicators will filter out the price too much and you will either enter too late in a trade, or have many bad signals.

Both of these situations can deplete your account faster than you can imagine.

For a proper system, I recommend a specific:

  1. Leading indicator
  2. Lagging indicator
  3. Static or Dynamic support/resistance indicator
  4. Entry indicator – usually a leading one.

Watch the video below to dig deeper into the subject of different indicator types.

Popular leading indicators are:

  1. CCI
  2. RSI
  3. Stochastic
  4. QQE

While poplar Lagging indicators are:

  1. MACD
  2. RSI
  3. Momentum
  4. ROC
  5. OBV

I strongly suggest you to download the MT4SE as you will have access to a perfectly coded, non-lagging indicators that will make your MT4 light as ever.

We usually use a lagging indicator to confirm the trend, and leading indicator to confirm an entry or immediate trend depending on settings. Static or Dynamic Pivot Point indicator is used for placing stop-losses and targets.

The takeaway is, don't be afraid to experiment with different indicators and settings on a demo account before going live.

I prefer to use a combination of one leading indicator, one or two lagging (like moving averages or MACD) and static pivot point (Camarilla or ACCU Pivots).

Backtest, Forward test and Live test

First of all, you need to know how your trading system would have performed in the past, before you test it in the present. Backtesting is the process of testing a trading strategy on historical data, to find out how it would've performed in the past.

This works on a premise that if a system worked well in the past, it will continue to do so in the future. Market conditions always keep changing, and that is the limitation of backtesting. Successful currency trading is a process that takes time but can be achieved.

Forward Testing

Forward testing is a simulation of actual trading and includes following the system's logic in a live market. We usually call it "paper trading" as the trade entries, exits and stops are documented and analysed. No real trades are executed.

Forward testing needs to be very logical and should follow the system religiously. Otherwise, it will be impossible to evaluate the system's efficiency.

Live Testing

I personally use the method that might be a bit different to those two popular methods, and I call it "Live testing". After forward testing has been completed, I open a small account (up to 500e) and test the system by executing live trades while strictly following the rules.

I think that system can only be fully tested if trader's psychology is involved in real market conditions. There is no system that can teach you proper money management — that is, unless you learn it yourself.

Here's an example of my PAM trading system that has been tested on LIVE account:

Source: Personal

Go Live!

After you have completed all the steps above, you should try some serious live trading. Find the optimal balance of trade execution. Remember that sometimes not having a position equals to having a profitable position.

One of critical factors for successful Forex trading is learning price action. Don't forget that price action trading can only complement your indicator trading knowledge. And don't forget to use VPS tool that we hope will help to protect you in volatility is too high.

If you have any questions, feel free to ask in the comments section below

Cheers and safe trading,


Risk Warning

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 83% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.