Once
you have chosen a type of trading system (mechanical or discretional),
chosen a concept and a trading style, follow these steps to create your
system.
1. Historical Moves:
While
looking at historical charts (the time frame you have chosen and within
the concept you have chosen) identify some substantial moves. Find as
many as you can so you can have a large sample.
2. Set Up:
See
what all these moves have in common. For instance, you may notice that
all these moves were formed after a consolidation pattern, or a
technical indicator reading was always above 50 for the up-moves and
below 50 for the down-moves, or the EMA(50) was always above or below
the price action when the move occurred, or the market always traded
above LOPS or HOPS, or they all developed at certain time, etc. Set-ups
tell you the conditions that have to be present in order for the move to
happen. Set-ups are a warning that a possible trade could come.
Whenever you see these conditions in the future, you need to get ready
because there is a possibility that your system signals a trade.
3. Determine Your Entry Rules:
Find
a trigger signal that is present in of the chosen moves most (it will
be impossible to find a trigger for all moves). It could be a MA
crossover, a specific indicator reading, a price reversal pattern
(reversal candlesticks), or it can be a combination of many, like a
reversal pattern off an important level (HOPS, LOPS, PP, Fibonacci
retracement, etc.), a moving average crossover when the indicator
reading is at certain point, etc. Some entry points seem brilliant at
first glance since you are not considering how many times your system
triggers a signal when the actual move (in your favor) is not present.
4. Risk Management:
Determine
at what point you are going to get out of the market because your trade
isn’t working, also determine if you are going to use a trailing stop
or not (if yes, what kind of trailing stop you are using).
5- Exit and TP Levels:
Sometimes
your trade does not reach your take profit nor your stop loss level, in
this cases you must use the same concept you used to get in the market
to get out of it. For instance, if you used a crossover to get in the
market, then a negative crossover will also get you out of the market
(if your set-up is not present with the trigger signal, otherwise you
would have to open a new contrary position), if you used price reversal
patterns, then if you get a reversal pattern against you then you should
exit the market. You also need to set your take profit levels. We
advise to use a RR ratio at or greater than 2:1.
6. Trade Management:
Determine if you are going to trade multiple lots, scaling out, averaging, etc.
7. Money Management:
What technique of money management you are going to use?
8. System Testing
Trade your system in real time
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