On the Internet you can find a huge number of ready-made strategies, but what if for a number of reasons they cannot suit us?
The solution may be to create your own indicator Trading System. But first, let’s define what a trading system is like.
In general, a Forex trading system is a set of rules that are aimed at obtaining profit in the market. At the same time, these rules can be attributed to two categories that are components of any trade:
- Rules for entering a transaction, exiting a transaction, setting a stop loss level, take profit, transferring a transaction to breakeven, etc. Everything that needs to be done on the market now and which is not needed.
- Money management – transaction volume, allowable risk, conditions for stopping trading, etc.
Important!!! This article will not fundamentally talk about the psychology of trading. In the presence of a fully formed TS, the role of psychology fades into the background.
Let’s move on to how to create your own trading system based on indicators.
We build a trading system
We will act classically and try to determine the current market trend. To do this, we will need any of the trend indicators that are in our standard set or have been additionally added to it. Such indicators allow you to be in the market for a long time, while there is directional movement and help filter out false trading signals about a trend change.
The most popular and widely used trend indicators include Moving Average, Parabolic SAR, Bollinger Bands, Alligator, Standard Deviation and many others.
The figure shows a daily chart of the EUR / USD currency pair with the trend indicator THV Coral plotted.
Everyone can use their favorite trend indicator. The limitation is only your imagination.
Often, good directional movements are not always observed in the markets. Most of the time the market is in the process of consolidation or flat. In common people they say that the market is “sawing”. Therefore, one more important element must be present in your indicator vehicle.
Add an oscillator to your trading system. Oscillators got their name from the English verb “to oscillate”, which means “fluctuate”, “vary”, as these indicators change their value within a given range or relative to zero. These include the following indicators: Relative Strength Index, MACD, Stochastic Oscillator, DeMarker, Awesome Oscillator, and others.
The figure shows a daily chart of the EUR / USD currency pair with one of the most popular indicators, namely RSI.
With the help of oscillators, you can trade in the flat using overbought or oversold zones, as well as predict possible trend reversals. This will help the concepts of convergence (convergence) and divergence (divergence) of the oscillator with the direction of price movement.
But that is not all. Indicators belonging to the class of oscillators can help enter the market on local corrections in the direction of the main movement, which will make it possible to reduce drawdowns when opening new positions.
At this step, it would be quite possible to finish. A trading system should be efficient and simple. Sometimes this set can be supplemented to your taste with various information indicators showing the spread, trading sessions, time to close the current candle, etc. if your trading strategy requires it.
We put all the indicators together and enjoy them.
The finished vehicle is built on two main types of indicators: oscillator + trend indicator.
Such a trading strategy will give you entry signals regardless of what stage (directional movement or flat) the market will be at a given point in time.
All tools used should be well understood by you.
Even in such a simple sequence of actions, many often make a standard mistake, which is best illustrated.
Perhaps the most common mistake is to add an excessively large number of indicators to the chart.
Many traders in vain assume that they will be able to better filter the signals they received for entering or closing positions by adding new tools.
Unfortunately, they do not take into account the fact that different types of indicators have a different calculation algorithm. All this leads to the fact that, together with the filtered false signals, completely good points for making transactions disappear.
The only way to deal with this problem is to study more deeply those tools that you use when analyzing the market. Do not limit yourself to studying the main types of signals and the properties of your indicators. Be sure to study the calculation algorithm and the main idea embedded in it by the inventor of the tool. These actions will allow you to reach a higher level of understanding not only the principles of your strategies but also the functioning of the financial market as a whole.
Another important drawback – piling up a large number of instruments on the chart leads to the fact that behind them simply the price itself is simply not visible. And this moment is especially important for those traders who use indicators in their TSs only as elements of filtering entry or exit points, and it is important for them to see a clean chart.
The combination of an oscillator + trend indicator will be the most flexible and versatile
The presence of a small number of tools will simplify their study and will complement your strategy with non-indicator methods. A huge selection of ready-made indicators will give you the opportunity to choose for yourself the most suitable ones for a specific trading style.
Money management will help to adjust the vehicle
There is no absolute grail on the market and any vehicle will periodically fail. Competent money management will help to establish the work of the trading system.
The way to determine the phase of the market
An important point, for which any indicator TS is very often and fairly criticized, is a way of determining which phase of the market we are currently in (trend or flat). While there is no single approach to solving this problem. In the next article, we will consider some possible ways to solve this problem.
Have a good trade!