If you don’t like the idea of trading someone else’s Forex System (it can be difficult), then why not have a go at making your own? Creating your own profitable Forex trading system can be one of the most rewarding and satisfying components of trading Forex, although it is a huge challenge at the same time!
Any Forex trader (even a novice) can build a successful Forex system – indeed, I would suggest that most people who go on to be successful do just that.
First, some words of warning. Like us, I am sure you have spent a lot of time (and money!) looking for a great Forex system. One of the main problems I see with traders is that they jump around from system to system, product to product. For some reason, we are never satisfied with what we have, and are always searching for something extra.
Perhaps the best advise that can be given to beginner (and even intermediate) Forex traders is STOP! Stop looking for the next best thing and try and understand what you have already. It may be amazing – maybe you haven’t given it a proper chance?
Stop searching for the Forex Holy Grail!
1. Define Simple Rules and Follow the Trend
The simpler the system, the better. This is for several reasons – if the system is too complicated, it will be very difficult to stick to the rules. It also means you may get confused – and you don’t want to be confused when your money is at stake!
A simple system might be to trade moving average crosses (e.g. 5EMA crossing 8EMA) on a 4H chart; and only in the direction of the trend on a Daily chart.
If the Daily trend is Long, then we will only take trades when a Long moving average cross signal occurs. We will ignore all the Short signals.
Our example Forex system uses a stop loss of 40 pips and uses a trailing stop. It is very important to ensure that our wins are at least as large as our losses - preferably our winners should be larger than our losses as we will not need as high a winning percentage for our system.
Example Forex System
2. Eliminate Risk Quickly and Let Profits Run
Eliminating risk is far more important than making money. Our first objective is to make the trade risk free and we do this by moving our stop loss to break even. Let’s say we move our stop to breakeven (risk free) at 30 pips. Furthermore, we will use an Expert Advisor (EA) to do this, and the EA will then begin to trail our stop once the risk element has been removed.
In this way, we can now let our Forex profits run. This phrase really annoys me normally, as everyone says it but gives no explanation as to how it is done!
Since we now have no risk on this trade, we can leave it alone until it runs out of steam – either reversing and hitting our new stop loss (break even) or letting it run and hopefully making us a good profit. We are also now free to make more trades – either on other pairs or “loading the boat” on the pair we are making a profit on!
You can download the trade manager discussed above here – Forex System Trade Manager.
3. Choose the Right Pairs
Once you have your Forex system, you will want to start testing it on a demo account from a reputable broker. We have some reviews and recommendations here - Choose the right broker for your Forex system
You will probably want to test your new Forex system on pairs with a good daily range and those which have high liquidity – the EURUSD and GBPUSD are ideal. It’s best to stay away from pairs such as the GBPJPY as these are very unpredictable.
Yen crosses can be tough to trade
Once you are happy with your system, start trading on a small live account.
4. Use Money Management
As a general rule, always risk 2% max per trade, 1% for riskier trades and when the market is flat. For more detailed information, Marc has written an excellent article which you can read here – Trade your Forex system with proper money management
5. Keep a Forex Trade Journal
It may sound boring and/or unnecessary, but keeping a log of all your trades will help you to become a better trader. Be honest with yourself – did you follow all the rules of your Forex system?
6. Make Profit Targets
The final part of your Forex system is establishing daily, weekly and/or monthly profit targets. Let’s say that we want to make 25 pips a day on average – that’s 125 pips a week and around 500 pips a month. Once you have hit that target, stop trading. This will stop you from over-trading and will also stop you handing your profits back to the Forex market.
Remember to always invest 2% per trade (or less – see money management section above). With compounding, you may well be surprised to see how quickly your account grows once you start trading with a profitable Forex system.
Good trading,
Simon.
