Hello dear friends!
Today we will discuss with you how to create your own trading system based on the indicators. Let’s see the pros and cons of such system.
You can find a lot of strategies on the Internet. However, you may want something different. And in this case you can develop your own indicator trading system. But first of all let's define what trading system represents.
Trading system
Generally, trading system at Forex is a guideline enabling a trader to earn profit in the market. The guidelines can be subdivided into two parts:
- A guideline showing how to determine market entry and exit points, points of placing stop loss, take profit and break-even levels. This is a procedure of actions to be done in the market for successful trading.
- Capital management: volume of trading operation, level of acceptable risk, conditions when the trade shall be ceased, etc.
Note that we will not talk about psychology of trading in this article, as in case of the well-developed trading strategy psychological factor becomes irrelevant.
Now let’s see how we can create trading system based on indicators
First step:
We will apply the usual manner for determining current market trend. We can use any trend indicator, provided in the standard set or added additionally. Such indicators allow to trade as long as directional movement continues in the market they also help to filter out false trading signals about changes in trend.
The most popular and widely used trend indicators include: Moving Average, Parabolic SAR, Bollinger Bands, Alligator, Standard Deviation and many others.
Fig.1
The figure shows the daily chart of the currency pair EUR/USD with the trend indicator THV Coral.
However, a trader can use his/her favorite trend indicator.
It happens that there is no clear movement direction in the market. Market can undergo a stage of consolidation or flat. Therefore, your strategy shall include one more important indicator.
Second step:
We suggest you to add oscillator to your trading system. Oscillator is an English word, which means "to vary". The indicator gets this name because it changes within a given range, or against zero level. These can be: Relative Strength Index, MACD, Stochastic Oscillator, DeMarker, Awesome Oscillator and others.
Fig. 2
Figure 2 shows a daily chart of the currency pair EUR/USD with one of the most popular indicator - RSI.
Oscillators enable you to trade in flat market using overbought or oversold zones; they also help to predict trend reversals. It will be helpful for a trader to know about convergence or divergence of an oscillator and price movement.
In addition, oscillator indicators can help to enter the market in case of the local correction against the main movement direction, which reduces a chance of drawdown when opening new positions.
This can be the last step, as trading system should be effective and simple. A trader may add some indicators, which provide information about spread, trading sessions, closing time of the candlestick, etc., if this is required by your trading strategy.
Third step:
Use your strategies and earn profit.
Fig.3
Trading strategy is based on two indicators: oscillator + trend indicator.
This trading strategy will give you entry signals regardless of the state of the market (movement direction or flat).
A trader shall thoroughly learn all information about the tools he/she is going to use
Possible mistakes
Here we will show you the most common mistakes, which traders often make.
Fig.4
Perhaps the most common mistake is the use of many indicators on the chart.
Some traders believe that the use of new tools can help them to receive better signals for entering the market or closing positions.
However, traders shall take into account that different indicators have different systems of calculation.
We would recommend to learn more about the tools, which you use for market analysis; make sure you know calculation algorithm and the basic idea of the tool suggested by a developer. It will help you to deeper understand principles of your strategy and also philosophy of the financial market as a whole.
Note also that too many tools on the chart can prevent you from seeing a price, which is particularly important for traders who use indicators for determining points of entry or exit, as they need to see a chart clearly.
Remember!
The combination of oscillator + trend indicator can be the most flexible and functional strategy
A small number of tools will facilitate their study and will complement your strategy indicator methods.
With the use of just two indicators a trader can give all his/her attention to learning all the details about these indicators, in addition to them a trader can apply methods, which do not involve indicators.
Wide variety of available indicators will make it easy for you to choose the most suitable for your trading style.
Money management adjusted to your trading strategy
There is no perfect strategy, from time to time any strategy can fail; therefore qualified money management will help to organize efficient operation of the trading system.
Methods of determining market trend
Trading strategies are often criticized for methods of determining market direction (trend or flat). Meanwhile, there is no common or unique method specifying market situation; however, we will view some ways of solving this problem in our next article.
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