The Essentials of a Successful Forex Trading System

From business to sports, politics to war, no successful endeavor has ever been won without a plan. Could you imagine a successful business without a business plan? Or a successful football team without a game plan? How about a beautiful new home built without a house plan? So it is with Forex trading. Without a well designed plan executed with exactness, no Forex trader can achieve long-term success.

So what are the tenets of a “well designed” Forex trading system?

1) Trading System Fundamentals. Not to be confused with fundamental analysis. The basic fundamentals of a trading system may include the currency pair(s) a system trades, the indicators used to determine entry, exit, and trade management guidelines, the time frame used by the indicator to trade, and the money management plan (money management will be addressed more in depth in a future article).

2) Entry and Exit Guidelines. The specific events that must occur for a position to be taken or a trade to be closed. It is important that your system has strict entry and exit rules. These rules govern when you are in and out of the market. They should be strictly followed putting aside human emotion.

3) Trade Management Guidelines. What events govern how a trade is managed while open. For example, a system may state that once a trade is 20 pips in profit the stop loss is to be moved to break-even. These are trade management guidelines.

4) Trading Schedule. When do you plan to trade? When will you accept new entries or exits? Is there a point when all trades will be closed? Certain times of day are better than others depending on the trading system you are planning. A schedule also helps you manage your life and put your priorities in proper order.

5) Trading Goals. These goals should be lofty but based in reality. If, through your back test results, you believe you can make 5% per month taking 1 trade a day and risking 1% per trade, then set that as your goal. Set yearly, quarterly, monthly, weekly and daily goals. Discipline yourself to follow your plan and achieve your goals.

6) Track your Trades. Keeping a log of each of your trades, and the system guidelines that signaled that trade is important. Doing this will help you identify problems with your strategy and improve it overall. This will also help you recognize how disciplined you have been in following your plan. Remember that you will have losing weeks and months. Keeping a journal will help you remember the winning periods while giving you crucial information to help improve the system during the losing ones.

Here is an example of a basic trading system. This system has not been tested for performance and so is ONLY for example purposes. Do not trade using these guidelines.

I) System Fundamentals:

a) Trade GBP/USD

b) Indicators – MACD 5.13.1 ; Stochastics 5.3.3; and RSI 14

c) Traded on a 15 minute chart

d) Money Management – Maximum risk per trade of 1% with take profit double the stop-loss. No more than 2 trades per day.

II) Entry and Exit Guidelines:

a) Enter – Long when MACD turns positive, stochastics must be less than 85, RSI is greater than 50, and a major news announcement affecting the currency pair to be traded is not slated to be released within the next 4 hours.

b) Enter – Short when MACD turns negative, stochastics must be greater than 25, RSI is less than 50, and a major news announcement affecting the currency pair to be traded is not slated to be released within the next 4 hours.

c) Exit – Take profit of 50 pips, Stop-loss of 25 pips.

III) Trade Management Guidelines

a) Move stop-loss to break even when trade reaches 30 pips of profit.

b) Close trade if short entry signal occurs.

IV) Trading Schedule

a) Trade from 8:00am BST to 4:00pm BST, Monday through Friday.

b) No trades to be taken the first or last Friday of every month.

c) No trades to be taken on Holidays.

d) 3 day vacation to be taken once ever quarter.

V) Trading Goals (Your goals should be written down in a place you can see them.)

VI) Track your Trades (Your trade log should be kept close and updated often)

While these are just the basics of a successful trading system, they are important steps towards building your own profitable system. A winning trading system combined with a disciplined trader is the formula for success.