What is a Trading Plan? Trading Style, Trading Motivation, Profit and Lose, Trading Routine and Tools
Different Types of Forex Traders? Scalping, Day Trading, Swing Trading and Position Trading
Mechanical Trading System a Full Overview and Strategy
Forex Trading Journal, Potential Trading Area, Entry Trigger, Position Sizing and Trade Management Rules
MetaTrader 4, How to Set Orders, How to Use EA and Indicators
Mechanical Trading System a Full Overview and Strategy
Mechanical Trading System a Full Overview and Strategy
Create A Mechanical Trading System To Save Yourself From Overworking
It is not uncommon for forex traders to work round the clock reading charts to identify as many trading opportunities as possible. This is quite draining and could lead to health complications like backache and others. Here is how you can prevent that overworking via automating trades.
What is a mechanical trading system?
While starting as a trader, it is always emphasized that you should create a trading system which should help streamline your trading activities. Further, you create a plan which helps to implement the trading system. The plan acts like your pathfinder and compass as you navigate the forex jungle.
Imagine if you could automate all these procedures and enjoy some time away from the trading table? Well, this is very much possible. A mechanical trading system enables your trading software to execute trades based on pre-set triggers.
This system can identify trends from which it generates signals for the trader to act on. Particularly, the purpose of this system is to prevent human emotions from negatively impacting rational judgment. Mostly, traders intend to implement this system on autopilot.
Before the system is deployed, the trader has to work everything out. This includes setting the rules about when to enter or exit the market, how much capital to allocate to each trade, and how much risk to take.
How are the systems created?
Designing this system is not easy, and it requires a deeper understanding of technical analysis and how the trading software works. How sophisticated your system depends on your level of sophistication.
Generally, the first step to creating a mechanical trading system is to select the desired timeframe. This could be from 10 minutes to three years. Secondly, you will need to define the conditions for entering a position. The conditions will be based on the most common entry rules, which are reversal rules and trend-following rules.
Third, you will define the exit rules. There is an option of choosing a stop loss rule or a limit profit rule. The former will prevent you from a margin call while the latter will realize profits.
Design Your Trading System in 3 Steps
3 Benefits Of Algorithmic Forex Trading
Automated trading is quite ubiquitous in the forex industry. Every day, traders sit for long hours to create a mechanical trading system with the primary objective of getting more time off the trading desk. These systems are linked directly to preferred brokers through the trading software available in the industry.
The fact that many traders opt for this automated system of trading implies that there are benefits worth consideration. Here are a few of them.
- It takes emotions out of the trading
A good number of traders who crash out of the market do not do so because they lack a solid trading strategy. On the contrary, the reason is quite separate from the effectiveness, or lack of, of the trading plan. Usually, the traders get overtaken with emotions, and they end up destroying potentially profitable positions.
Once you have created your mechanical trading system, the only remaining thing is to take the output and use it to make decisions. Preferably, you can design the system in such a way that it operates autonomously and you have to do is check if there is any loss made or return earned.
- It achieves consistency
Trading as a human is full of many challenges. This is especially significant in this age of Facebook, Twitter, and YouTube. The challenge is to remain alert for all the trading sessions without succumbing to the distractions brought by social media and even gaming.
Such distractions can lead to one missing important trading opportunities, or even lead to one blowing up an account for not paying attention to drawdown limits.
On the contrary, an automated trading system strictly follows the trading plans without any deviation. This system cannot alter rules unless commanded to do so. Therefore, one should expect a 100% consistency from the algorithm.
- Diversified trades
Unlike humans, algorithms can handle as many accounts as possible. As such, one can employ various strategies or even open multiple trades with a view on spreading the risk and creating a comfortable hedge. Normally, the systems can execute trades in milliseconds, and hence, one cannot miss any trading opportunity.
Build Your Trading System in 3 Steps
Building A Trading System
After learning the technical analysis basics, you should now put all that information into developing a trading system. That should offer you a view of what you are after when building a forex trading system.
The trading is a moving average crossover system that applies moving averages in the determination of whether to go short or long. Before entering a trade, more technical indicators are used for confirmation. The technical indicators come in handy when establishing entry and exit levels.
There are three steps you can use to develop a trading system
- Defining the time frame
- Determining entry triggers
- Determining exit triggers
- Swing trading that is trading on a daily chart
- Application of 5 SMA to the close
- Application of 10 SMA to the close
- Stochastic (14,3,3)
- RSI (9)
When entering a trade enter long if the 5 SMA crosses over the 10 SMA and when all stochastic lines are destined to the top, and the RSI is more than 50. Avoid entering when stochastic lines are in the overbought region.
Consider entering short if the 5 SMA crosses under the 10SMA and when all the stochastic lines are on a downward trend, and the RSI is lower than 50. You should avoid entering if you see that the stochastic lines are in the oversold region.
Consider exiting when the 5 SMA crosses the 10 SMA in the reverse direction to your trade or when the RSA crosses 50. You can as well exit the trade once it reaches stop loss of 100 pips.
Try different time frames when your daily chats seem to be slow. Always remember that the quicker the time frame, the higher the probability of false-positive trades. Usually these are trades that seem to meet entry rules, but in the end, you will get stopped out. You should note that a trading system will only work if it is followed to the latter. You should be disciplined and play by the rules.
The “So Easy It’s Ridiculous” Trading System
The Trading System
You now have the trading components of a forex trading system and has first decided to with a swing trading system you are going to use a daily chart.
The next step should be to use simple moving averages to help in establishing a new trend. The stochastic is vital in determining whether it is okay to enter a trade after the moving average crossover. It equally helps you to avoid the overbought and oversold areas. Another additional tool that will help you in determining the strength of your trend is the RSI.
After establishing the trade setup, we then determined the risk for each trade. According to this system, let’s say we will risk 100 pips per trade.
We equally defined the entry and exit rules, and at this point, we should start the testing phase by initiating manual backtests.
Example of a trade: Buy EUR/USD
Consider the chart below of a long trade set up.
If we consider this chart based on system rules, you would realize that this will be the best time to go long. For you to backtest, you will need to write down at what possible price you would have entered the stop loss as well as the exit strategy.
You will need to move the chart step by step for you to ascertain how the trade works.
In the chart above, you will realize that you would have some decent pips after this trade. You notice that when the moving averages crossed into the opposite direction, it was an opportune time to exit.
However, not all trades will appear attractive as some will be so unconvincing. Therefore the secrets are always to try to remain disciplined and play by your trading system rules.
Below is an example of a short entry order
The chart meets our criteria since there is a moving average crossover and a downward momentum of the stochastic. It is equally not in the oversold region while the RSI is lower than 50. This is a suitable opportunity to enter short.
We can now record the entry price, the stop loss as well as the exit strategy before moving the chart forward systematically to see what will occur.
The trend was very strong with the pair dropping around 800 pips before getting to another crossover.
You may start wondering how this system looks that simple and yet profitable. The truth is it is such simple, and you shouldn’t be afraid of anything. In the trading world, the acronym KISS is very common, and it stands for “Keep It Simple Stupid.” It implies that forex trading systems are not complicated; they are just simple.
You don’t need a huge number of indicators on the chart because if you keep it simple, you will have less to worry about.
After testing your system through backtesting and having a live demo trading for around two months, you are good to go provide you keep by the rules you will reap in the long run.
Believe in your trading system and have confidence with your instincts. For complex forex trading systems, you should try Pip Surfer’s Cowabunga system or Huck’s HLHB system.
Creating Your Own Mechanical Trading System
Importance Of Forex Trading Journal
To become successful in forex trading, you must have a trading journal’ it is a very vital thing to consider in any goal-oriented or performance-oriented endeavor. A journal helps you have a way of measuring, tracking, and staying focused on your trade to enhance your performance.
Journal helps in discipline
As a forex trader, you should keep a journal to help you in “getting them buckets.” This means you have to be consistent, disciplined, and most importantly remaining profitable. A profitable trader is a disciplined trader, and the first step of developing your discipline is to start by having a trading journal.
Although it may look easy or simple, it can be challenging, and most forex traders will despair after some time and start depending on the logs or transaction history provided by forex trade brokers. The transaction history or logs from brokers can offer information that is slightly useful since it doesn’t explain the reason for entering or exiting the trade, which will not be of help in your next trade.
Refining trading strategies
A trading journal is not all about the recording of your entry and exit, but it should be also about the refining of your strategies as well as becoming an expert of your psychology. Generally, it is about your emotional, psychological state before the trade during and after.
For instance, your trading method will tell you to buy USD/JPY, but your instinct will convince you that it will not work. So you will bear in mind that the trade might not work but still you going on with it because you have to play by your trading plan.
At the middle of the trade, the price near your stop loss by three pips and you start wondering why you didn’t listen to yourself and because you are about to lose you have to exit. You decide to close, but then after a few moments, the price jumps to the original price target. You start cursing had you stayed you could have collected significant pips. This is why a trading journal is important because this typically happens with most traders.
Most of the time, you may exit from trade too early, fail to follow the trade plan, and equally fail to separate emotions from your trading. Without a journal and if you keep trading that way, your balance will be wiped out before you even realize it.