Some things to think about when developing a system:
First, how do you want to trade- scalp? Day trade? Swing? Position?
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2nd is that you need to develop an edge. This is an area that I feel a lot of new traders approach wrong. Don’t look for a “when this happens, it means this is going to happen.” Look for a “when this happens, it means that there is slightly more of a chance that this will happen” (Hope that makes sense).
Some examples of common ‘edges’ traders use-
When price approaches the top or bottom of a range, they trade a reversal.
If price breaks above a recent high, they go long (or short if price breaks below a recent low).
They look for chart patterns to form (head and shoulders, double top, etc)
They simply follow the trend.
Look for something that you see develop the same way each time on that particular pair. Again, remember, you are not looking for something that always happens, you are looking for something that is slightly more likely to happen.
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Then develop a way to enter. For instance, if you trade a reversal as price hits the top of a range, figure out how you will enter. Will you wait for price to touch the edge of the range? Will you wait for it to start reversing?
Maybe if you are simply trading the trend, you wait for a small pull back, and enter when price hits support/resistance, or a fib number.
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Then figure out where you will place your stop. Your stop should be placed at the spot where you know the trade is not going your way. An example is if you range trade, its the spot where you know price is definitely breaking out of the range and not reversing. You want to use as much support/resistance between your entry and your stop as possible.
You might also try the ATR tool for stop placement. For myself, I simply use support and resistance and whole numbers, both with a buffer.
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Look for a potential profit target. The other end of the range, or the next major level of support/resistance for instance.
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Look at the risk if you are stopped out verses the potential profit if you are correct on the trade (Risk verses Reward). Develop a minimum risk to reward ratio and only take the trade if it is better.
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Develop a whole money management system. Look at expectancy-
how much you make when you are right, verses how much you lose when you are wrong, verses how often you are right or wrong to develop an overall system.
You goal is not to be right on every trade. You goal is to fully understand that you will be wrong and lose money on a good percentage of your trades. Therefore concentrate on making as much as you can when you are right (let your profits run) and losing as little as you can when you are wrong (cut your losses off quick) so that over time your system is profitable.
Cheers
Tek
