If you intend to build your own trading system then the first step involves understanding what a trading system conveys. The trading system basically suggests a given set of rules that a financial market participant need to follow when the person indulges in buying or selling of assets on this market. The trading system gives you the right to organize and allocate specific rules for opening a position. A sound trading strategy organizes trading and lays down theclear algorithm for entry and exit from a position, lowers the probability of a change, thus resulting in better profitability of the trader. Designing of a sound trading system involves following few steps, this includes:
1) Timespan- When you plan to create your own system, the priority should be on deciding on what kind of forex trading you indulge in. Whether you are a day or a swing trader? What is thepattern by which you follow the charts and for how long you like to hold on to your positions? This information will help in concluding the time frame for which you will be trading. Before you start it is important to build one strong strategy as a baseline.
2) Analyze new trends- The purpose of the trading system is to find trends as soon as possible, so using indicators can help in achieving goals. The indicators like moving average prove fruitful, as they are the simplest and yet the most effective medium to locate new trends.
3) Justify the trends- The moving average crossover makes you identify a new trend in the swiftest way, but it doesn’t guarantee that the identified trend is true. In order to find the trend to be true,acrossverification by means of other indicators is required. Indicators like RSI, Stochastic and MACD can help in confirming the trend. Moreover, with experience one can take a lead on what indicators to incorporate into the system for verification.
4) Check your risk appetite- It is not always that trading only leads to profits, a good trader always takes into consideration the probability of loses as well. So, when you plan to develop your own trading system, define your ability to take arisk on every trade. This will help in acknowledging the amount that you can accept as loses and give your trade some space to breathe. Moreover, it will also lead to better management of money.
5) Define start and exit- A trading system involves creating rules, so once you have defined your risk appetite, set rule on when to start and stop a trade to achieve maximum profit. Few traders enter when all indicators match up while other enters after the candles close. Few even enter in the middle of the candle. The timing of entry varies based on own trading experience. Similarly, for exits few people follow their set target, few give emphasis on support and resistance levels. So, set your exit plans based on your set criteria.
6)List out rules and follow- The system created by you runs on your laid down principles, so note down all rules and make it a point to follow the rules. Only discipline and dedication will lead to the creation of a robust system.