Writing a Rule Based Trading System

A trading system is a set of trading rules that specify when to open & when to close trades. To come up with a complete trading system a trader is also required to the following advanced rules that will guide his method. These rules are also part of the trading system but cover a wider approach of how a trader uses their trading system when opening & closing trades.

The following things will also be included within the trading system that a trader will come up in order to make the trading system of a trader complete.

Mindset/Forex Psychology

This section of the trader's trading system will write down the mindset that a trader will follow when setting their trades using their trading system. Your mindset as a trader should specify that you will only follow the trading signals generated by your system & you will not open trades just because the market has started to move up or move down. If a trade signal is not generated by your trading system then you will not place any trade on the market. The way you will make sure that you follow only your trading system is by using forex psychology to control your emotions in trading.

You should be prepared to be disciplined enough when trading to follow what your trading system is saying. You should never go against your trading system & base your trading decisions on what the market is doing. You should be objective when following the rules of your trading system. This will be a matter of training yourself to follow your trading system even when you make a trade that loses money you must follow your trading system and close the trade at the specified level where your rules say the trade should be closed to avoid further losses. Close that trade & wait for another trading opportunity, there will always be another opportunity to trade tomorrow, next week or next month you don't have to stay on one trading until you lose all you money and after you miss the other trading opportunities which you would have heard.

You'll also have to determine the best style method for your personality so that you are comfortable with types of trade that you place in market. For example if you can execute trades quickly then you may choose to be a scalper, if on the other hand you are the type of trader that likes to take time before making a decision then scalping may not be the best trading style method for you, instead you should become a day trader or a swing trader & that way you can have enough time between trades to make a decision. By selecting a trade style that most suits your personality is the first thing you should do & after you have made the correct choice of the trading style method that most fits you then you will have the right mindset when trading and you'll increase your chances of being more successful when trading the forex market.

Set Goals To Follow When Trading

You have to know what goal you want to achieve when it comes to trading & executing trades with your trading system. Your goal may be that you want to follow your trading system all the time and never take any trade that is not indicated by your trading system. Another goal may be that you want to be more disciplined when executing trades by being patient enough to wait for a signal to be generated by your trading system before opening a trade & that you will not jump the gun & open a trade before the signal is generated. Sometimes a trader may see that a signal is about to be generated by their trading system but it has not been generated according to the rules of the trading system but a trader may decide to open a trade before the signal and wait for the signal while they are in the market, this should not be how a trader should trade, traders should learn to be patient enough to wait for the signal to be generated before opening a trade.

Select The Most Liquid Currency Pairs To Trade

Traders should also specify the currency pairs that they will be trading with their trading system. A trader may come up with a trading system which has a trading strategy that is best suited for trading some currency pairs only. The trader should therefore only trade with their trading system when they are trading only these currencies. This is because the trading system may not produce the same profitable results when applied to other currencies such as the currency pairs known as exotic currency pairs.

Most trading systems will produce best results when they are applied to trading the most liquid currency pairs and therefore a trader should make sure that they only trade those currency pairs that are best suited for their trading strategy. This is why traders should specify in their trading rules the currency pairs that they will be trading.

Money Management Rules

For a trading system to be very successful then a trader should make sure that they also specify the money management rules that they will always follow when trading the currency exchange market.

The money management method that a trader uses should have a high risk:reward ratio so as to give the trader more chances at becoming profitable when trading with their trading strategy.

The money management should specify at which level a trader will close out a losing trade: the trader should also make sure that they close all their losing trades at this point.

A trader should also never risk more than 2% of their account equity on any one single trade transaction.

The trader should also determine where they will always take profit when their trade is profitable. The take profit level should be two times the stop loss level. For example is a trader is setting their stops at 25 pips then the traders should set their take profits at 50 pips. This is what is known as a high risk: reward ratio to trade with. This risk reward ratio is 2:1, which means a trader can make two times profit the amount that the set as their loss. This way by using a high risk reward ratio means that a trader will be more successful in the long run because their trading method uses a high risk reward ratio that means they stand to make 2 times the amount that they set as their loss.

Keep a Trading Journal

Traders should always keep a journal and this trading journal will prove to be a very helpful tool when it comes to improving their trading system.

For example when a trader is designing their system & they want to test it out on the forex market, then the forex journal will prove to be a very helpful tool to help them do this. This because while testing out the trading system traders will record all their trades on this journal and after a while they can use this trading journal to review their trades, traders can find out why the losing trades made losses and determine what factors in their trading strategies are resulting in generating signals which make losses, the trader will then try to not make these same mistake while trading in the future. A trader will also try and find the patterns that help them to make profitable trades and the traders can then use these patterns to trade with in the future so that they can improve the profitability of their trading system in the future & there help them to become more successful.