A trading strategy is a method of trading forex, stocks or cryptocurrencies that are based on a series of analyses to determine whether to buy or sell a financial instrument and set procedures to determine the entry and exit strategy as well as risk management. Trading strategies can be based on a set of signals derived from technical analysis charting tools or fundamental news-based events.
Forex trading systems can be either manual or automated. For most day traders, a forex trading system is usually made up of technical signals that create a buy or sell decision when they point in a direction that has historically led to a profitable trade. The system is generally a trading plan that outlines what a trader should do when the signal is identified and trading journal that captures what was done and why for future analysis and refinement of the system. This is manual forex system trading that anyone can engage in. Running a manual system involves sitting at the computer screen, looking for signals and interpreting your trading plan to decide what to do.
>> See an example of an accurate forex trading system with 90% positive signals.
In an automated forex trading system, the trader teaches the software what signals to look for and how to interpret them. It is thought that 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. More complex automated systems also come with common strategies and signals loaded in so the trader can combine several approaches in their system with relative ease.
Automated trading systems typically require the use of software linked to a direct access broker, and any specific rules must be written in that platform's proprietary language.
Continue reading or play around with an Expert Advisor Generator and build automated forex trading systems in a couple of clicks without writing codes.
Here’s the basic idea behind how we locate simple, low-risk, high potential trades. Start your search for low-risk trades by scanning charts with time frames that are 4 to 5 times longer than the time frame from which you intend to trade. The first goal is to find low-risk entry points by identifying the long-established, and therefore most reliable, support and resistance areas (s/r) because they’re where the risk of opening a position is lowest. Here’s why.
If price breaches long-term strong support, that’s a clear signal that price is moving decisively against you. By entering close to strong support, you can also set your stop-loss order relatively close to that support, so that you escape with only a small, affordable loss, ideally, one that is ever less than your maximum allowed a loss of 1 to 3 percent of your account.
Like a bird of prey, you begin your hunt where you can view lots of territories. The longer time frame chart allows you to view key s/r points over months or years. Then, if you see something interesting (a pair approaching one of those levels) you swoop in for a closer look at the shorter, time frame chart from which you actually trade, in order to make your final trading decisions. That’s where you’ll see if you’ve got a situation that combines a low-risk entry near strong support, with a likely resistance area far enough away from your entry point so that you have a good chance of earning three times as much as what you’ll lose if your stop-loss is hit, for a 3:1 reward/risk ratio.
Note that the longer you think the trade will need to play out, the more important it is that the trade fits with your fundamental analysis for your planned holding period. This is less important if you think the trade will last less than a week or so unless you’re trading based on a specific news item that’s due out during that time. However, trades that may take weeks or months are typically based at least in part on some theory you have about how certain fundamentals are likely to play out.
For example, you go long the AUDJPY because you believe markets will be optimistic over the coming weeks or months (favoring risk over safety currencies), or you believe Australia’s economic data will be much better than Japan’s.
>> To better understand how to read the news just use our forex factory calendar guide.
The purpose of your first screening is to find a currency pair that meets the following four criteria:
For an advanced forex trading system, these are the first criteria for low-risk, high-reward trades. Remember that definitions of support and resistance are the opposite for short and long positions.
Again, we scan for situations that look like they might fulfill the preceding criteria on charts with a time frame approximately four to five times longer than the time frame on which we trade. For the examples that follow, we trade off daily charts, so we scan weekly charts in the first screening.
This first screening doesn’t take long because we generally prefer to trade only the most liquid pairs. There are only about eight really liquid pairs, and maybe about 20 liquid enough for most of your trading.1
In short, we’re scanning the weekly charts of these pairs for an entry near strong support, with any likely resistance far enough away so that there’s a chance of getting a 1:3 or 1:2 risk-to-reward ratio (rrr).
As we’ll see, the deciding factor in whether you take the trade is if the second screening on the daily charts shows you can get a combination of stop-loss, entry, and exit points that allow the desired rrr yet does not cost you more than 1 to 3 percent of your account if the stop loss is hit.
For the purpose of illustration, assume just one entry and exit, and mostly avoid consideration of variations like trailing stop losses and partial or staged entries and exits.
When we talk about strong support or resistance, that means we want to see at least one well-tested kind of support, ideally as many kinds as we can get, all converging on a narrow price range. Just to remind you, these include:
Again, there are many more accurate forex indicators you could use, and we haven’t even covered momentum indicators yet. But these give us enough for some trading examples from our trading guides using the above links.
Once you’ve found some situations that meet these criteria on the weekly charts, the next step is to see if the same criteria for low-risk, high potential reward trades are present in your chosen time frame, in this case, daily charts.
Why bother with the first screening? As noted previously, the longer time frame chart shows you stronger s/r levels. We’re hoping to find an entry point on the daily charts that is near the stronger s/r areas found on the longer time frame, in this case, the weekly charts. If we find that a pair nears its weekly s/r, we’ll know it’s worth doing a second screening on the daily chart.
Again, the deciding factor in whether you take the trade will be if the daily chart (or whatever timeframe from which you trade) shows the combination of stop-loss, entry, and exit points that allow the desired rrr, yet will not cost you more than 1 to 3 percent of your account if the stop loss is hit. To reiterate:
Regarding stop loss placement, remember that there are different methods. These include:
Regarding rrr, if the trade is in the direction of a very strong trend, it’s safer to be more aggressive, so we’re more likely to accept a 1:2 rrr.
In the end, you’re always trying to strike a balance between the size of the loss if hit versus the risk of being stopped out. In other words, the farther away your stop-loss is from your entry point, the bigger the loss if hit but the lower the chance of being hit by random price fluctuations rather than a real move against you.
If the second screening shows that you can get the desired rrr without risking more than 1 to 3 percent of your capital, you take the trade near strong support. The precise entry level you choose is a judgment call. You’re trying to strike a balance between entering at the best price and not being so greedy that price never hits your order and you miss the trade altogether.
This screening occurs on a chart time frame four to five times shorter than your trading time frame. For example, if you’re trading on daily charts, then use two- to four-hour candles. This one usually doesn’t determine whether you take the trade. Instead, it’s mostly just to identify short-term s/r points that are likely to be temporary, so you’re not surprised if the trend halts or reverses around these zones. Rather than getting worried, you expect a progressing trade to temporarily halt or even reverse. These areas can also serve as points where you augment or reduce your position if you’re using staged entries and exits.
At times, this screening may alter your strategy. For example, if price repeatedly struggles to break through the resistance you see on the four-hour chart, that might indicate that the longer-term trend may be failing, especially if important new information just came out. Similarly, if there’s too much quality short-term resistance too close to your entry, you might elect to enter in stages, saving most of your planned position until price clears that resistance area. Alternatively, if there are better opportunities or if breaking newscasts doubts on your conclusions from the second screening, you might change your mind about the trade and just get out.
While any good trader should be using most of the techniques we cover, within this forex trading system guide, there are different types or styles of trading for any given time frame. Here’s a brief listing of the most popular styles. The idea is just to acquaint you with these terms. There are whole books written about each of these trading styles, so use this listing as both an introduction to the vocabulary of trading styles and as a starting point for further research into the styles that interest you. Just take these as general labels, because trades often combine elements of more than one style. The most popular types of trades include:
As swing traders, momentum traders are less focused on entering on a bounce off support. Instead, they want to enter just after price as broken through key resistance, which suggests a new stage in the trend.
In sum, position, trend, range, and swing traders seek to buy low and sell high. Momentum traders seek to buy high on breakouts past resistance because these suggest price is making its next run higher.
Again, with all of these styles, the longer you think you’ll be holding the position, the more you need to consider longer-term fundamentals because they’ll have more time to influence the pair.
To understand how to build an advanced forex trading system is important, but if you need help MetaTrader 5 | MT5 provides some of the best tools for any forex trader. Additional, use an Expert Advisor Builder and generate easy forex trading systems with high profitability.