Developing a Forex Trading System
Have you ever had to assemble or build something, but didn’t have the instructions to do so? If you’re building a bird house, or something simple like a cabinet, you may not need the instructions. If you are building a house, that is a different story. Building a house without a blueprint can be very dangerous and end as a complete disaster. Yet, many of us treat our forex trading in this way. As Forex traders we are attempting to build a “wealth house”, but some of us are not using a blueprint. It is dangerous and will almost always end up disastrous. A Forex trading system is the blueprint to your trading. Without planning ahead by establishing a Forex Trading System, you are planning to fail. A Forex Trading System incorporates goals, an entry strategy, trade management, risk management, account management, and a plan. I encourage you to consider whether or not you truly have a blueprint for your trading. If not, you can write one down today!
Goals are what will help you persevere through the times of losses as a trader. A goal is what you are looking forward to accomplishing, by result of your trading. This is the reason that you are trading. This is the “why”. Wanting to make more money is a general goal, but as you write down your goals, be more specific. A few examples would be: ” I want to double my account in the next 2 years.”, or “I want to be able to pay off my daughters college tuition with the funds I earn trading Forex.” You can establish six-month goals, one-year goals, two-year goals, etc. These goals are personal and totally customizable. When you establish the “why”, “why am I trading”, you can stay faithful to the “what” (the rest of your Forex Trading System).
The entry strategy is what puts you in the position to potentially profit. The entry strategy decides what point you will enter the trade. Whether you use a moving average cross, a trend-line-break, a forex news announcement, a different indicator’s signal, or a different entry signal, establishing a head of time what signal you will enter on is critical. Your entry strategy determines when you are going to enter a trade to risk your money, so taking extra time to consider where and when your entry will occur is well worth it.
Many times we treat the entry strategy like it is the most important part of our trading system. That is arguably not true. No matter where you enter a trade, there is profit potential and a high probability that some time or another that trade will go into profit. It may take a few minutes, a few hours, days, or maybe even years but there is a good probability that sometime that trade will go into profit. Therefore, your discernment on where to exit that trade is very critical.
There is a lot to be said about money management. Trade management incorporates everything between the opening of the trade and closing the trade. Having a plan for every possible scenario in that time period is crucial, if we want to be successful. Remember, if you fail to plan, you are planning to fail. These are some questions to ask ourselves before every trade (this list is not extensive):
- Is there a hard profit target?
- Is there a trailing stop?
- Do you take partial profit?
- How much profit do you take?
- When do you take the partial profit?
- How many times do you take partial profit?
- Is there a point where you would add to the trade?
- Should you ever pull the entire trade off before it hits a stop or target?
- How do you handle the trade if news is coming out?
Account management is composed of how you will treat the funds in your account. Will you take funds out of your account every month? Will you keep adding funds into your account every month for two years straight?
It’s good to have discipline in this. What are you able to reasonably do? Figure it out, write it down, and do it. Developing your Forex trading system is not something to do rashly, take your time. Research. If you want to take several months or longer to develop your system, before trading, go ahead and do that, don’t be caught up in some kind of get-rich-quick mindset.
Risk management is so vital to a successful trading system. It is glue that holds it together. You can have the best entry strategy, trade management, and account management, but without risk management, you can lose everything, very fast.
Beginner traders can struggle with this a lot because it is tempting to risk more money when you see a potentially high profit trade. If you have an entry strategy that incorporates different levels of risk for different signals, that is fine. Just entering a trade with higher risk because it looks like a “better trade” is very unwise and is a sure way to hurt or wipe out your account in no time.
Your trading plan encompasses all of these aspects. The plan is what brings everything together and provides order to how these five components operates in unity. Just as car has many parts, but only functions while they are together, so your trading plan needs to bring the goals, entry strategy, trade management, account management, and risk management together.
The Relative Strength Index (RSI) is an extremely useful and popular momentum oscillator – these are indicators of market momentum, based on the principle that as momentum slows, there are fewer buyers and sellers for the current price, in other words, volume decreases. This is the opposite for momentum for when price/volume action increases. The RSI Indicator shows future probable changes of direction before trading actually reverses. This makes it a great way to start watching for a trade entry or exit. This powerful indicator was developed J. Welles Wilder and introduced in his 1978 book, New Concepts in Technical Trading Systems. There are a couple of other well-known trading strategies that employ the concept ‘Relative Strength,’ so don’t get confused with them, and just talk about the RSI. The RSI Indicator measures the ratio of moves higher to moves lower in a specific period. Wilder preferred a period of 14 (minutes, hours, days, etc.). up-moves to down-moves. The RSI index is expressed in a range of 0-100. Readings of 30 or lower indicate the probability of the currency pair’s being oversold, meaning that it’s gone just about as low as it can, and so there ’s a reasonable likelihood of the price going up. Readings of 70 or higher indicate the probability of a currency pair’s being overbought, meaning that it’s gone about as high as it can, so the price is likely to come down. How the RSI Indicator works There are two equations used in calculating the RSI reading. The first equation calculates the initial Relative Strength (RS) value, which is the ratio of the average ‘Up” closes to the average of ‘Down’ closes over ‘N’ periods represented in the following formula: RS = Average of ‘N’ day ‘s closes up / Average of ‘N’ day’s closes down The second equation provides the number that the trader will use to make decisions. It is calculated by indexing the indicator to 100, through the use of the following formula: RSI = 100 – (100 /1 + RS) But you don’t need to make this calculation. On your forex trading platform, you’ll find an RSI indicator all ready for you. You just have to click on it to get the number you need to make trading decisions. Trading with the RSI Readings below 50 show the currency pair hitting the support floor level, and above 50 show the price rise meeting resistance. Obviously, readings well below 30 or above 70 indicate a stronger probability of a reversal. Remember: Nothing is certain in forex trading, but having the RSI on your side, along with another trend indication strongly suggests that you should take action, according to your trading strategy. Using Two RSI Readings at Once There will be different RSI readings depending on the period you choose to apply. The default setting is 14 periods (the one Welles Wilder, its inventor, liked). But the 14 period setting doesn’t react as quickly to trend reversals. So try a 5 period reading instead. This will give you a faster trend indication, but one that may not be long-lasting. So here’s the trick: Use two RSI indicators at once. You set up the RSI with a 5 period and an RSI with 14 period settings. When the 5 period RSI crosses the 14 period RSI, you have a rising price action. When the opposite occurs, you have a decline. RSI Classic Divergence The RSI Classic Divergence is another well-known indicator of a trend reversal. This one is a bit complicated: 1) The currency pair price hits a lower low – this means it has hit the support floor, then gone up, then gone below the support floor price; 2) The RSI diverges, however. It also hits a low, but then it makes a higher low; The divergence of the RSI from the price movement is again a strong suggestion of a trend reversal. The example above shows a bullish divergence. The same technique works, of course, for what is called a bearish divergence. In this case, the currency pair makes a higher high, but the RSI drops to a lower high, suggesting that the rising trend is weakening and a drop in price is coming. Many traders work with classic divergence for trade entry and exit. It is a relatively low-risk method to sell near the top or buy near the bottom. As you gain experience in trading, you will find that there are many other ways to work with the RSI. It is a kind of old reliable for forex, and particularly when combined with other indicators, it is very useful.
With the advent of the internet age, the popularity of forex trading, and day trading particular, has risen exponentially. People who previously had no access to the markets due to various constraints and limitations can now participate with little more than an internet connection and a bit of capital to start with. With every new enterprise, especially where money is concerned, caution is always key. In currency trading, there are many risks to be navigated and mistakes the experienced ones must learn to avoid in order to be successful. An important point to note here is that in the currency markets, what you do can sometimes be just as important as what you fail to do, and the best way to try and find the right balance is to get as much quality information as possible while keeping your expectations, risk appetite, and emotions at healthy levels. It can be a challenge for anybody. To help out forex market participants, both beginners and old-hands, here’s a quick look at some of the most common avoidable mistakes and negative trading habits. We’ll get right to it. Trading Before News Releases This might sound a little strange, but taking a position on a particular security before some anticipated news hits is rarely a good idea. News trading, whereby the current events of the day determine the trading behavior of market participants, might seem like the natural day trading method, but it has its pitfalls. When news hits, the market expects that there will be a general market reaction or a particular related security will be influenced. The fact is, nobody can ever be sure exactly how the market will react to certain events or news. Good news might send a holding’s value to absurd heights only to have it crash once the market corrects itself. Price action can create vast gaps in mere moments and these spreads can catch the unwary trader short. The volatility involve here simply isn’t a gamble worth the risk involved, and is a dangerous trading habit to cultivate. Averaging Down Part of being a great day trader is knowing when to cut your losses and move out of a position. Being able to accept the reality in front of you – that you were wrong about a particular holding – is what will allow you to exit it once you’ve hit your stop loss criteria. The temptation to lower your stop loss levels in the hopes that the holding will recover is simply throwing good money after bad, and has no place in a winning strategy. Taking Up High Leverage Positions Leverage refers to the ratio of debt to equity on any purchase you make or position you take. Forex traders are a prime target for brokerage firms who offer them to traders who are unable to resist the chance to trade at levels multiple times the size of their account. The temptation of astronomical profit relative to their input can simply be too much. The thing to keep in mind here is the fact that systematic controls and proper planning are the hallmarks of a successful trading regime, and this is what makes most experienced and successful traders keep away from highly leveraged positions except in very rare circumstances. The fact that you’re not making money trading without leverage should tell you that you won’t make money trading when you do decide to use it. Keep things simple and safe – Admiral markets recommends that you wait until the effectiveness of your trading strategies is proven before making use of leverage. Trading More Than 1% This is probably the most commonly repeated trading advice you could get out there, but the fact is, it’s so often ignored that repeating it here can only be helpful – never risk more than 1% of any account on any one given trade. A lot of people ignore this rule because it doesn’t fit in with the high-excitement trading they pictured in their minds or because of the finances involved in sticking with the rule (you’ll need to have $10,000 or more in an account to make a $100 trade). Day traders have a huge advantage here, as they can start off with relatively small trades with no restrictions. Stick to the rule and you can avoid quite a bit of headache down the road. Trading for Immediate Income Many people become traders hoping to be able to earn a livable income from it. This desire can be an overwhelming one, and it has caused many out there to forego proper planning measures. A sure sign of such cases is where a trader requires profits immediately in order to settle their bills. This isn’t what trading is about – it’s about building up sizable risk capital over time but this is impossible if money is being pulled out every so often to settle living expenses. It can also be an incredibly stressful way to operate as the profits on trades are not guaranteed and will vary depending on the market conditions.
Trading is a business and like many businesses, you need tools to help you in your business. If you are a Futures trader, you have no doubt looked into Futures trading software and wondered exactly what it is you require.The trading software you will need will depend on what type of trader you are. Swing traders may need different trading software than a scalper.Assuming you have the basics such as the best trading platform and order entry programs covered, I want to touch on a few pieces of software and services you may find useful for not only Futures trading but any market or instrument.These are not endorsements but are gleaned from the many traders I speak with on a weekly basis.Data Feed For Futures TradingIf your trading strategies call for intra-day trading volatile markets such as crude oil futures, you will want to ensure you are trading with an extremely reliable data feed. data feed for futures tradersWhile data is not futures trading software per se, without it, other important trading software would be useless.Kinetick– Many of the traders use the Ninja Trader trading charting software for futures so this is no surprise. Quotes are not sacrificed for unfiltered delivery speed so the price you are getting is straight from the exchange. When trading fast markets, the last thing you want to worry about is the quality and speed of your price quotes.Their price point is in reason compared to other data companies. Data feed is not a glamorous topic however speed, reliability and costing are variables you should keep in mind.Just as you turn on the light at home and expect a constant stream of electricity, you should expect the same from you data provider.On the topic of backtesting, ensure your data feed has enough historical data to allow a large sample of market conditions to test. Kinetick offers 180 days of tick data, 2 years of minute data and 10+ years of daily data. That may be enough to give you a solid glimpse into the viability of your trading plan and system if you are interested in trading futures for a living.Breaking News SoftwareWhat if your futures trading strategy relies on up to the minute news and insights to help define a trade setup?How about software that allows you to monitor and analyze many different securities at once?One very powerful piece of future trading software for traders is:Bloomberg Terminal– A trader I know that trades for a fund said he would not turn on the charts until Bloomberg was fired up. That is how important this trading software is to his business.bloomberg software Global coverage is their hallmark and while they produce their own content, they have 1000+ other news sources plus the ability to harness the power of social media for instant and in the moment news broadcasting.We’ve all seen how a misplaced word from a govt leader can affect the market to the tune of 400 points in a hearbeat. Fast delivery of news content for those whose futures trading strategies rely on news and errant spikes to be effective is vital.Economic releases can shake the market and having the important releases front and center and the results of the release can be an exceptional asset to certain types of traders. I personally know a trader who will only start trading when a highly volatile releases such as NFP (Non-Farm Payroll) occur.You can imagine that having up to the second information on these events is part of his trading edge.Tracking the main markets such as Dow, S&P, NASDAQ, and even gold futures can help traders have a birds eye view on the risk on/off situation for the trading day.It does come with a cost and this type of software for futures trading may be out of your reach. There are many benefits to the investment that will all depend on your goals and how much overhead you want to have.Trading Automation SoftwareAutomated Futures Trading Software – Whether you are trading oil futures or your business is e-mini futures trading, this type of software can do much of the heavy lifting for you. If you have done any robot_bannertrading at all, you know the battle you have with your trading emotions. Paper trading (demo trading) can sometimes give you an insight of the greed/fear emotions but nothing takes the place of live trading with actual money on the line.Automated trading software can do everything from locating and triggering trades to trailing and exiting your positions.There are two huge benefits to this type of software:1_ No emotional trading – It’s a mechanical strategy that has been tested out over time. When variables line up, the trade is triggered regardless of your personal bias. If you were starting at your trading charts, you may find reasons to sit out “this trade”. You may decide to lighten up the position.That brings me to the Turtle Traders and the heating oil example. Only 1 trader, Curtis Faith, followed the trade plan and reaped a windfall for his mentors. The others found reasons to not follow the plan and paid a hefty price for doing so.Objective trading at its finest is what this type of trading software can do for you.2_ Have a life outside of trading – Unlike the standard approach to futures trading, you don’t have to be glued to your computer screen out of fear of missing a trade. Since markets are basically in play 24 hrs a day, your prime setup may occur while you are on vacation or sleeping. Automated software is online around the clock ready to execute your backtested and proven trading plan.This is just some of the trading software that is available for those interested in trading futures. Software also comes with different qualities and price ranges so ensure what you are using is aiding your trading…not hindering it.Even those that make their living currency trading online can benefit from employing a strong data feed, news wire and automated trading programs.For those traders that love the “thrill” of day trading, they can still utilize the automation in regards to trade management or even locating and entering swing/position trades. Anything that helps us stick to our trade plans and protect our trading accounts is always worth consideration.