Forex Trading Systems
How to Build a Forex Trading System from the Ground Up
When you're just starting out trading forex, the idea of building forex trading systems seems far-fetched. You are too busy trying to figure out how to read the trading platform dashboard. So many charts, so many ticking numbers…you throw yourself into the markets.
There is nothing wrong with learning on the fly. And since you probably start with a practice account, it's not real money anyways.
But that attitude can get you into trouble.
The earlier you can start building a forex trading system that works for you, the better off you will be when trading the foreign exchange markets. Here are a few areas of strategy that every forex trader must figure out if any legitimate FX trading system is to be created:
The first thing in the world that there never seems to be quite enough of: time. Also, conveniently, the thing that you must be most concerned about when building a forex trading system from scrap.
Setting a Trading Schedule
For one, just because the forex markets trade 24 hours per day does not mean that you should trade for 16 of those. You may want to do that, you may feel compelled to do that, but if you really do that, without setting up life ahead of time to fit that, you will get crushed.
Instead of going that route, choose regular, limited times of the week that you trade forex. Loads of clever traders choose the various openings of the foreign exchange markets--London, New York, Tokyo, Sydney--and only trade during those first few hours. You may prefer the lower volume trading hours mid-week if you like a moderately slower-moving market.
But like it’s up to you to learn the latest forex news from sites like Daily FX, it’s also up to you to set your own schedule. The point is for you, not the markets, to be in charge of your time.
Trading Time Frame: Choose One
Other than setting at least some semblance of a schedule, you will additionally want to be careful about trading too many different time frames with individual trades. Rarely will you find a successful forex trader who does not specialize in a style of trading. Day trading, swing trading, and carry trading are three noted styles, each requiring extensive learning experiences.
Staying reasonably consistent in the type of trade you favor--type defined in this case by time spent in each trade--will help you develop a forex trading system.
Indeed, this decision as to how quickly you want to turn your trades over can be thought of as the foundation of the forex trading system that you will be building.
Forex Robots Make It Easy
One X factor that must be a part of the time-system strategy is the idea of forex robots, software programs that generate buy and sell signals based on mathematical and algorithmic patterns. The idea of letting a computer do the work for you is optimal from a time conservation standpoint.
The key with forex robots, though, is to never abdicate control of your forex trading system. Do not assume that any autotrading forex system will do everything for you. Many forex robots must be configured by the user, others are only proven effective for specific currency pairs.
Forex autotrading can be a great time-saver. But, of course, saving time will not mean making money if you choose a forex robot product that is bogus.
The second major topic that every system-inclined forex trader must address is how much cash you have on hand to be involved in forex trading at all, and also how much cash you should be putting out for each trade.
If your forex trading system does not protect and grow your forex trading account, it cannot be viewed as much of a system. Money management is a prime-time skill.
Eliminate Unnecessary Confusion
Beginning at the beginning: you will never be able to manage your money in a forex account without being able to read and instantly understand what is going on with the money in that account. Far too many currency trading platforms are much more complex than they need to be.
It's almost as if they want you to be confused, like the carpets in Vegas.
Sooner rather than later, you must gain visibility on your trading funds. This may entail adjusting the settings on your existing forex broker, changing brokers, or even writing your own software program. Whatever you need to do, get it done.
Until you have a handle on how much cash you have on hand, what your pending trades could cost you, and how you know all this moment to moment, you cannot claim to have any forex trading system that deserves praise.
Finding the Why
Why are you making the trade you're making? Have you found the why?
Justifying each trade is hard work. But hard work pays off. When you have a reason for getting into a trade, either on the short or the long side, you're 100 percent better off than the guy who bangs on the keyboard like an ape and calls it strategy.
The best justification for most trades on the forex markets is usually technical as to the entry point, but fundamental as to the motivation. You identify a trade opportunity according to economic and monetary principles, but you get in when the chart tells you to.
Whatever adherence or deviance you espouse to this way of doing business, the most valuable part of the exercise is to find the why of why your forex trading system should work.
Test Theories and Results
Do you have a forex trading system, or do you just think you have one?
The only way to know is to test your theories and, most importantly, test your results. If the forex trading system you're using is not producing substantial gains, you kind of have to rethink whether or not there may be a better foreign exchange trading system out there.
This is where it comes in handy to work with an online forex broker that facilitates easy testing of future strategies and past results. Many online forex brokers lack in this department, creating a market for third party data services such as eSignal.
The bottom line here: you can't know if you have a good forex trading system unless you are constantly testing the performance of your system in various markets, over a period of time.
Important Forex Information
The most important step in currency trading is finding the right broker; our forex experts can help. See our
reviews of forex brokers for more information.
In order to understand when to sell short in the forex market, we must examine individual currency short selling strategies. Learn the strategy of short selling currencies.
While it is true that the bigger your position, the more you can benefit from utilizing the carry trade forex strategy, smaller investors can beneit, too. Read about the carry trade.
Forex traders must always be concerned about price and momentum, as well as how those two factors are interacting with each other. Learn about price vs. momentum.