Creating a good and proven trading system is not an easy job. Different Forex strategies try to predict future prices on the basis of past developments. I call it “Historical vs. Now moment” concept.
I will explain some of the basic concepts behind different Forex strategies and attempt to summarise the main tools used by traders in breaking down price patterns.
Traders usually come to me with these questions:
Creating a system that is based on indicators is different from price action trading. Forex systems that are created with different indicators can be used successfully if a trader knows how to interpret them. Too much information might cause so called “paralysis by analysis” which can keep you from making trading decisions that are actually profitable. Beginners should know once and for all that there is no best trading system in the world. The system only helps us stack the odds in our favour and make profitable decisions.
Almost every trading platform comes with a host of indicators that those who engage in technical trading may find useful. You simply apply any of them to your chart, with the system performing calculations based on the past price, current price, and volume.
Trading consists of different styles that I call “dimensions”. You as a trader need to choose which styles you’re more comfortable with. Whatever dimension you choose, rest assured that knowing price action will complement all styles of trading. We can classify Forex trading dimensions as:
When you choose which dimension you will trade in, it is time to choose the appropriate timeframe. Timeframes are generally divided as:
Very often you will come across a system that has dozens of indicators cluttered on the screen. I must say, that is a completely wrong approach. The more indicators you have, the more issues you run into with you MT4.
The main purpose of Forex indicators is to:
If you clutter your charts with too many indicators, how will you define the trend, entry and targets? Different indicators will filter out the price too much and you will either enter too late in a trade, or have many bad signals.
Both of these situations can deplete your account faster than you can imagine.
For a proper system, I recommend a specific:
Popular leading indicators are:
While poplar Lagging indicators are:
We usually use a lagging indicator to confirm the trend, and leading indicator to confirm an entry or immediate trend depending on settings. Static or Dynamic Pivot Point indicator is used for placing stop-losses and targets.
I prefer to use a combination of one leading indicator, one or two lagging (like moving averages or MACD) and static pivot point (Camarilla or ACCU Pivots).
First of all, you need to know how your trading system would have performed in the past, before you test it in the present. Backtesting is the process of testing a trading strategy on historical data, to find out how it would’ve performed in the past.
This works on a premise that if a system worked well in the past, it will continue to do so in the future. Market conditions always keep changing, and that is the limitation of backtesting. Successful currency trading is a process that takes time but can be achieved.
Forward testing is a simulation of actual trading and includes following the system’s logic in a live market. We usually call it “paper trading” as the trade entries, exits and stops are documented and analysed. No real trades are executed.
Forward testing needs to be very logical and should follow the system religiously. Otherwise, it will be impossible to evaluate the system’s efficiency.
I personally use the method that might be a bit different to those two popular methods, and I call it “Live testing”. After forward testing has been completed, I open a small account (up to 500e) and test the system by executing live trades while strictly following the rules.
I think that system can only be fully tested if trader’s psychology is involved in real market conditions. There is no system that can teach you proper money management — that is, unless you learn it yourself.
Here’s an example of my LIVE account statement
After you have completed all the steps above, you should try some serious live trading. Find the optimal balance of trade execution. Remember that sometimes not having a position equals to having a profitable position.
One of critical factors for successful Forex trading is learning price action. Don’t forget that price action trading can only complement your indicator trading knowledge.
If you have any questions, feel free to ask in the comments section below
Cheers and safe trading,
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MSc (Master of Economy) Nenad Kerkez, also known as Tarantula or NKT, is a Forex, CFD, Equity and Gold trading expert, mentor and educator.
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