A mechanical forex trading system is comprised of a set of technical chart indicators and a set of trading rules. These rules should specify the parameters of the indicators and identify the entry and exit conditions. The system should also have provisions for risk management and other specifications for unusual market factors. Here are the steps to get you started in building a mechanical trading system.
First, you have to pick a time frame on which to execute and hold on to your trades. This depends on your personality so you should see if you are comfortable with being a scalp trader or a longer-term position trader. For those who like entering and exiting trades in a matter of moments, scalp trading can be implemented on a 5-minute to 15-minute time frame. For those who feel more comfortable with trading longer-term trends, systems that trade daily or weekly time frames might work out.
The next step has to do with choosing the forex indicators you'd like to work with. You can choose from a set of oscillators or leading indicators, combined with one or two momentum indicators or lagging indicators. These can help you identify and confirm trends that are taking place. In this step, you can also tweak the parameters in order to better filter out fake outs or false signals while at the same time allowing you to catch good trade opportunities.
The third thing you can do is determine your entry and exit rules. While the indicators allow you to identify potential price moves, the entry and exit rules will specify where exactly you will buy or sell. Some options include setting orders at the open of the next candle or a few pips above the previous highs or lows.
Fourth, you can now set your risk management rules. How much will you risk per trade? This question elicits different answers from various traders as it is determined by one's confidence or aggressiveness. This percentage amount should be the basis for setting your stops so that you will be okay with losing that amount and bounce back later on.
Now that you have the basic components of a mechanical trading system, you now have to write your specific rules and follow them. This encourages discipline and allows you to be more consistent with your trade decisions. If you are able to do so, you can code the system in an expert advisor so it can implement trades by itself on your platform.
First, you have to pick a time frame on which to execute and hold on to your trades. This depends on your personality so you should see if you are comfortable with being a scalp trader or a longer-term position trader. For those who like entering and exiting trades in a matter of moments, scalp trading can be implemented on a 5-minute to 15-minute time frame. For those who feel more comfortable with trading longer-term trends, systems that trade daily or weekly time frames might work out.
The next step has to do with choosing the forex indicators you'd like to work with. You can choose from a set of oscillators or leading indicators, combined with one or two momentum indicators or lagging indicators. These can help you identify and confirm trends that are taking place. In this step, you can also tweak the parameters in order to better filter out fake outs or false signals while at the same time allowing you to catch good trade opportunities.
The third thing you can do is determine your entry and exit rules. While the indicators allow you to identify potential price moves, the entry and exit rules will specify where exactly you will buy or sell. Some options include setting orders at the open of the next candle or a few pips above the previous highs or lows.
Fourth, you can now set your risk management rules. How much will you risk per trade? This question elicits different answers from various traders as it is determined by one's confidence or aggressiveness. This percentage amount should be the basis for setting your stops so that you will be okay with losing that amount and bounce back later on.
Now that you have the basic components of a mechanical trading system, you now have to write your specific rules and follow them. This encourages discipline and allows you to be more consistent with your trade decisions. If you are able to do so, you can code the system in an expert advisor so it can implement trades by itself on your platform.
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Wondering what makes forex trading better than stock trading? Check out this website on why you should start trading forex forex trading.
Forex is all about risk analysis and probability. There is no single method or style that will generate profits all the time. The key to success is positioning ourselves in such a way that the losses are harmless, while the profits are multiplied. Such a positioning is only possible by managing our risk allocations in accordance with an understanding of probability and risk management.
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