How To create A Trading System – Learn To Trade Forex With c-Trader
Hello guys, in the previous video we talked about Technical and Fundamental Analysis.
In today’s video we’re going to talk about ‘How To Build Your Own Trading System, it’s important if you want to be successful as traders to think like traders.
So what is a training system exactly and when a trader talks to another about his trading system what exactly does he mean?
A trading system is comprised out of three things:
- Is entry rules, how to enter the market and when to enter the market
- Is exit rules, when to exit the market if you already have a position, and
- Is your risk management, your overall risk management that determines your position, sizing and your stop losses usually
So let’s talk about each of these individually:-
Entry: in order to enter the market you must have specific technical rules, its more advisable to use technical rules when entering the market even if you are a fundamentalist trader and you know already your direction is going to be long or short because of your fundamental analysis you should do technical analysis and pinpoint the best places to enter the market.
Second very important thing is to be aware of the announcements of the economic calendar before you enter. There is a reason that if there is a major announcement somewhere around the time you want to enter there might be very, very huge volatility that you don’t want or you want, so at least you need to be aware of the announcements of the economic calendar.
The third thing is your risk to reward ratio. What’s a risk to reward ratio? Most traders never get into a trade if they think that they’re going lose more money than they’re going to actually win. So your risk to reward ratio should be at least 1:1, you should at least risk a specific amount of money to make the same amount of money, it’s more advisable to have a bigger ratio like 2:1 so that you risk like a hundred dollars ($100) to, to make two hundred dollars ($200). To make a bigger amount of money, most novice traders should stick to 1:1 or 2:1 and leave 1:5 or higher entry ratios for the more advanced and experienced traders.
The next concept is the concept of your exit. Now what’s important with your exit? That is where most traders get destroyed in the market. The reason is because of trading psychology which we’re going to talk about more specifically in more detail in another video. Now I will just say that you need to exit on predetermined rules, when you enter the trade you need to know exactly when and how to exit and you don’t, you should not bend those rules even if that they are technical rules or risk management rules you should stick to the rules. If you think the rules are wrong close your position when it’s supposed to be closed, stick to the rules, execute your rules and then you can stop and think and change your rules for the next time but please stick to the rules. That’s the most important thing about exit, it’s usually also done on technical terms you can find very good exit points in the charts on when the price is going on very high standard deviations or even on your fundamentals and news announcements if you see, if you’re long and you see a news announcement that’s short you can close your trade.
Let’s see some, an example of an entry and an exit on cTrader, this is just a random example to show you how someone would think as a trader. I’ve just drawn a trend like here before the video and we see that we are actually on the trend line, we also have here a hammer, this is specific candlestick that it’s a pretty good, pretty possible reversal signal so I will decide to enter long, the reason why I am entering long is because I’m on the trend line and I see a hammer for example but those are my rules. I have already selected the volume I want to select and now I’m going to decide on my exit, I can exit with losing (stop loss) and I can exit with winning (take profit), we talked before about the 2:1 risk reward ratio, a hammer gives me a very good 2:1 risk reward ratio because the whole point of the hammer, this specific candlestick is that it’s supposed to be a reversal signal that means that the price should not go below the hammer, if it goes below the hammer there is no reversal. So I can put my stop-loss just below the hammer and then I can put my take profit just below the previous swing so even though it’s a trend I want to play it safe and I don’t want to go higher than the previous higher.
As we can see now I’m risking 8 pips to make 20 pips so this is a pretty cool trade and no matter what happens I will not be moving my stop loss or take profit and I will not be doing anything else because I have already made my decisions, if I see that there is a problem with my trading system I’m gonna stop at some point and think about improving my trading system but that will, what I will not be doing is what destroys most traders which is, I’m seeing now that the price is not going the way I want to and I’m going to, when the price reaches my, close to my stop loss, I’m going to be like, no, no, no, no, I’m going to put it just a bit below and then it reaches my stop loss again and I’m sure it’s going to turn back and I put it just a bit below and I’m gonna keep on doing that and the thing is that you may do that a couple of times or three times successfully but there’s going to be one time that’s going to be unsuccessful and it’s gonna blow your account .
Now let’s talk about the third important concept that we talked about which is risk management. Risk management is about the amount that you’re going to trade, this is very important depending on your training frequency you must think about how much of your balance you will risk with every one of your trades. If your trading frequency is high for example you trade like 10 trades per day or 20 trades per day, you should be risking a small amount of your balance with each trade, if you’re trading more infrequently and you put more thought into your trades or you like a swing trainer trading every two months or something then you can risk more something like I don’t know five percent (5%) of your balance or something like that but risking more than that then you’re not trading anymore you doing something different, if you risk fifty percent (50%) of your account which each trade obviously at some point you’re gonna blow your account.
One last thing that I want to talk about how to test and filter your system, about filtering, a trading system doesn’t have to work all the time and in all symbols, you may, I will give you an example, the market volatility is not the same at every hour after twelve o’clock (12:00) in the night at Europe there is no volatility so you may consider testing your system during the high volatility hours. Another thing is the symbol that you are trading it’s not the same if you are trading a low volatility symbol, or a high symbol like EURO/USD so try to filter your system and think where it’s going to do better.
In this video we talked about how to create your own trading system and how to think like a trader thinks of a trading system. I’m going to remind you again try to keep a 1:1 risk /reward ratio it’s very important, try to think how much of your account you risk with every trade have good entry and good exit rules.
Next videos we’re going to talk about Trading Psychology and go into more deeper technical analysis.
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