The focus of this article is to walk you through the steps of developing a trading system. It does not take too long to develop a system, but you need to spend some time to fully test the system. Therefore, be patient. From a long-term perspective, a good trading system will likely help you make a lot of money.
Trading System—Six steps to create a trading system
Step 1: Time frame
When developing a trading system, the first thing you have to determine is what type of trader you are.
Are you a day-closing trader or a swing trader? Do you look at the chart every day, every week, every month, or every year? How long do you want to keep your position?
This will help you determine the time frame you use when trading. Even if you look at multiple time frame charts, this will determine the time frame you mainly use to determine trading signals.
Step 2: Find an indicator to help you determine the new trend
Since your goal is to determine the trend as early as possible, we need to use indicators that can achieve this goal. Moving average is one of the most popular indicators used by traders to judge trends.
Use two moving averages (one fast and one slow), and then wait until the faster one crosses the slower one or moves below the slower one. This is the basis of the “moving average convergence” system.
The simplest form of the moving average intersection system is the fastest way to identify new trends. It is also the easiest way to discover new trends.
Of course, traders still have many ways to identify trends, but moving averages are one of the easiest tools to use.
Step 3: Find an indicator to help you determine this trend
The second goal of our trading system is to avoid double losses, which means that we don’t want to be trapped in the wrong trend. Our way to avoid double losses is when we find a signal of a new trend, we can use other indicators to confirm whether it is true or false.
There are many indicators that can be used to confirm the trend, but we prefer smooth moving averages, stochastic indexes and relative strength indicators. As you become more familiar with various indicators, you can find what you like, and then integrate it into your system.
Step 4: Identify your risks
When creating a trading system, it is very important to determine how much loss you can afford for each transaction. Not many people are willing to discuss the issue of loss, but in fact, a good trader will think about how much loss he/she is willing to bear before considering how much money he/she can make.
The amount of loss you are willing to bear will be different from others. You need to determine how much breathing space your transaction requires, and don’t take too much risk in a transaction. In the following courses, you will learn how to manage funds. Money management has a huge impact on how much risk you take in each transaction.
Step 5: Clear admission and departure
After you have determined the size of the loss you are willing to bear in the transaction, the next step is to find out where the entry/exit can get the most profit.
Some people like to enter the market immediately when their indicators match each other and send a good signal, even if the candle has not yet closed. Other traders will wait until the candlestick closes before entering the market.
A trader said that he believes that waiting until the candlesticks close before entering the market is the best option. He entered the market many times before the candle line closed and all the indicators matched, but finally found that at the close, the transaction was completely contrary to his expectations.
This is just a matter of trading style. Some traders will be stronger, and eventually you will discover what kind of trader you are.
In terms of leaving, you have several options. You can move your stop loss. If the price moves X points in your favor, move your stop loss setting by X points.
Another method is to set a fixed target and leave the market when the price reaches the target. How to calculate your target point is up to you. Some people choose support and resistance levels as their goals.
Some people set the same points every time they trade. No matter how you calculate your goal, make sure you will stick to it. No matter what happens, don’t leave first. Stick to your system! After all, you created it.
Another way to leave is that you have a set of standards, and when the standards are met, you leave. For example, if your indicator retreats to a certain level, you leave the market.
Step 6: Write down the rules of your trading system and follow
This is the most important step when creating a trading system. You have to write down the rules in your trading system and follow them.
Adherence to principles is a trait that traders must have. Therefore, you must act in accordance with the trading system. If you don’t follow the rules, your trading system is useless, so remember to stick to the principles.