One of the hardest, most time-consuming aspects of creating an accurate forex trading strategy is finding the right toolbox of forex indicators you habitually use and combining them THE RIGHT WAY. Combining indicators in the wrong way into your trading strategy can lead to a lot of confusion, wrong price interpretation and, subsequently, to wrong trading decisions.
A forex trading strategy is based on a series of analyses to determine whether to buy or sell a currency pair and set procedures to determine the entry and exit strategy as well as risk/reward ratio (risk management). A profitable Forex system can be based on a set of signals derived from technical analysis charting tools like indicators.
This article will explain how to build an accurate forex trading strategy with step-by-step guidance and illustrations. For support use also our study regarding the logic behind a perfect forex trading system.
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A forex trading strategy that uses different indicators which belong to the same indicator class and then show the same information on a trader’s charts won't work. Never ever!
The screenshot below shows a forex strategy with 3 momentum indicators (MACD, RSI and the Stochastic). Essentially, all 3 indicators provide the same information because they examine momentum in price behavior. You can see that all indicators rise and fall simultaneously, turn together and also are flat during no-momentum periods.
Such a forex strategy will generate wrong, duplicate signals. Not good!
The problem with a forex strategy combines multiple indicators that show the same information, it ends up giving too much weight to the information provided by the indicators and he can easily miss other things.
A forex trading strategy who uses 2 or more trend indicators might signal that the trend is stronger than it actually is because both of his indicators generate the green light and it might miss other important clues the charts provide.
The following data arranges the most commonly used indicators in a forex trading strategy by categories. Now, you can avoid using indicators that are from the same category and combine indicators from different categories that complement each other.
For more information refer to our article explaining what are forex indicators and how to combine the best ones.
Now comes the interesting part.
The screenshot below shows a chart with three different indicators that support and complement each other. The RSI measures and identifies momentum plays, the MA finds trends and the Bollinger Bands measure volatility. Note here that we do not use the Bollinger Bands as a trend indicator but just for volatility.
We will build a forex trading strategy step by step and show how accurate are the forex signals it generated. Additional, we will recommend some additional analytic tools in order to filter the signals even better and improve the risk/reward ratio. And, in the end how to make it automated and avoid human mistakes.
MetaTrader 5 platform allows the combination of indicators and this is one the main objective of this guide because few know or use this option for their trading app. We will build the forex system by combining RSI, MA and Bolinger Bands in order to obtain accurate trading signals.
To implement this strategy in real-time we recommend using MT5 AM Broker with a forex demo account first. Or, use code WELCOME20 to get a 20$ welcome bonus for a live trading test. If successful, you can offer trading signals and get paid.
Choose a Daily chart to start with. We will use EurUsd for our forex strategy.
Step 1 - Add the RSI and set the parameters of this indicator
After you have completed the step above, the settings menu appears. Most indicators can be controlled by several common parameters.
The amount of periods used for the RSI for this trading strategy is 8.
For different timeframes, other periods can be used. To find the best timeframes, currency pairs and periods use an expert advisor builder that can test multiple strategies in a few minutes and generate the most profitable ones. The most profitable forex strategies generated can be also exported as a Forex EA or Forex Robot (Expert Advisors)
To change the settings of the indicator directly on the chart at a later date: Right-click the RSI and set a new value.
For convenience choose the blue color from Style.
1. Open Navigator / Indicators / Trend
2. Drag and Drop Moving Average over the RSI window.
ATTENTION: If you drag and drop the indicator over the chart, or you launch MA in a classic way, you won't be able to apply to First Indicator's Data.
For convenience choose a different color, we recommend red.
3. Set the parameter, choosing THE SAME period like the one used for RSI.
4. Apply to: First Indicator's Data
After applying MA to RSI, here is how your window should look like.
The 2 indicators are enough to generate a signal, but we need another one to filter the crossover. The crossover will indicate a potential change in the direction of the trend. Using Daily charts that means the forex strategy targets only major and intermediate trends or intermediate counter-trends.
1. Drag and Drop Moving Average over the RSI window.
2. Set the parameter, choosing the default ones (20).
3. Apply to: First Indicator's Data
For convenience choose a different color, not to be confused with RSI and MA.
In the end, your screen will look like below. Your forex trading system is complete and should generate accurate buy and sell signals.
The trading system generated a buy signal when the RSI crosses over MA, and the crossover is below the Bollinger median. We have used vertical lines to highlight the change in the direction of the trend and the signal generated by the crossover.
ATTENTION: Wait for the Daily candlestick to close, so the crossover is considered confirmed.
The sell signals appear when the RSI crosses below the MA and the crossover is above the Bollinger median. The signal appears at the end of the day, which is why it is also called the Midnight Signal. It accurately indicates trend changes. Try to avoid signals in sideways markets, by using other trend analysis indicators. Use our study that explains how to use a trendline the right way to spot a change in trend.
It is used only on the Daily chart and requires more depth to define the exit techniques with Stop Loss or Take Profit. It is recommended to use it in combination with the other classical methods of analysis for better efficiency.
For support use our guides related to candlestick chart patterns, pin bar trading, support and resistance levels, price action. Additional, learn how to use fixed and trailing stop-loss orders the right way.
This accurate forex trading system can be either manual or automated. Running the system manually involves sitting at the computer screen, looking for signals and interpreting the signals to decide what to do. We hope the above details will help you build a profitable forex strategy.
In an automated forex trading system, you teach the software what signals to look for and how to interpret them. Automated trading removes the emotional and psychological components of trading that often lead to bad judgment. Automated forex system trading, known as Forex Robot or Forex EA, tends to reduce human error and reduce reaction time when certain levels are breached.
Build an automated forex strategy based on RSI, MA and BBs using the best Expert Advisor Builder (14 Days Trial) and export them in MetaTrader 5. Use our in-depth guide about Forex EAs to learn how to transform the above system into a money machine.