Anatomy Of A Complete Forex Trading System

Posted on: November 21st, 2009

As the majority of new traders bounce from system to system, its important to stop and look at what makes a Complete Trading System. We need to know:

  • Which Markets/Currency Pairs do we trade? - If you are trading more than 4 markets and are losing money, its a good idea to specialize and get to know the pairs you trade. Personally I find cross pairs, especially yen crosses very hard to trade with short-term strategies as it’s like the pair is in a middle of a tug-a-war, getting pulled in opposite directions.
  • Risk Control / How Much To Trade - It’s important to know exactly how much of your trading account you will risk per trade, and also to have a predefined “pain threshold”, if you lose X amount in a day/week you will quit trading and re-evaluate your strategy. Without proper Risk Control, you can not be a successful forex trader
  • Entries and Exits - Exactly when do you enter and exactly when do you exit a trade? If you don’t know this, you might as well go to the casino and play blackjack, your odds are about the same. (bad)

  • When Not To Trade - There are times when you should not be trading the market. If you have a trend-following strategy and the market is range-bound, you should not be trading or your account will get eaten up. And vice-versa, if you have a counter-trend/range strategy and the market is in a major trend, you’re just throwing your trading money out the window. Know thy strategy!
  • Time of Day - this is similar to the last point, but I gave it a new heading because its really important. If you are a daytrader, just because the market is open 24 hours a day does not mean you should be trading at all times. There are many hours per day that have very low volatility for example, if your forex strategy requires high volume, you will get chewed up. Spend time analyzing and backtesting your forex system and find out which times of the day work best.

By covering the above points you will be heading in the right direction, I can’t emphasize enough the importance of really knowing your trading strategy inside-out, what are it’s strengths and weaknesses? How do you know when you’re wrong? When exactly do you take profit or take a loss? To be a professional forex trader, you really need to treat this like a business.

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