How to Develop a Profitable Trading System.
Learn How to Develop a Profitable Trading System - Creating Proftibale Trading Systems.
I have been in the business of market speculating and market trading education for about 20 years. While Futures and Forex have always been the main markets I trade and manage accounts in, I've also spent plenty of time trading stock options as well. My path began on the floor of the Chicago Mercantile Exchange, well before the average retail client had access to online-trading. After time on the trading floor, I left and pursued a trading career from the friendly confines of home. Back then, I was faced with shaky trading data and charts at best and the task of phoning in orders to a trade desk. Needless to say, change and growth have been explosive in this industry since my early days.
The Birth of Trading Systems.
Advances in technology have been the driving force behind the change and growth. One of the many recipients of faster and stronger technology is system trading as high speed computers now help retail and institutional traders develop trading systems, crunch numbers, and back test real and hypothetical trading results in seconds. In the world of professional money management, I have seen plenty of trading systems. Ironically, most don't seem to work and of the ones that do, they typically work for a bit and then fail. Being on the education side of the industry as well, I've seen hundreds of automated systems yet, I can only say that I have seen less than a hand full actually produce a consistent profit year after year. I often get e-mails from people who have read an article I wrote that want to share an automated trading strategy with me. They are sending it so I will help them review it and perhaps improve it. Traders will send me back tested hypothetical performance reports from these strategies that suggest they have the holy grail of trading systems. Most of these will show 80% winning trades or better and huge profits. Most of the time however, when they take the next step and trade the system with real money, they lose and lose fast. With explosive advances in technology and market information, why is system trading so difficult for most who give it a try? There's a very simple reason I will discuss later. In this article, I will focus on the foundation of a profitable trading system, offer specific tools and rules of a profitable system, and expose the dangerous traps that lead to system trading failure.
The Most important Aspect of Developing a Profitable Trading System.
As much change and growth has occurred due to technology, there is one component to trading that has not changed one bit and that is how the consistently profitable trader derives consistent low risk / high reward profits. The key to a proper trading strategy all comes down to the foundation of that strategy. To have the proper foundation, you must have a solid understanding of how markets work and why price moves as it does. If you have one flaw in your thought process, you can be sure it will lead to poor trading results. The reality is that markets are nothing more than pure supply and demand at work, human beings reacting to the ongoing supply / demand relationship within a given market. This alone, ultimately determines price. Opportunity emerges when this simple and straightforward relationship is "out of balance." When we treat the markets for what they really are, and look at them from the perspective of an ongoing supply /demand relationship, identifying good trading opportunities is not that difficult of a task. Market speculators who understand this simple concept and what this opportunity looks like on a price chart typically derive their income from market speculators who don't. In other words, those who "know" get paid from those who "don't know."
Who's On The Other Side Of Your Trade?
If we want a consistently profitable trading system, we had better make sure that the person on the other side of our trades is making a mistake. Our system had better be an expert at finding a novice trader or we're in trouble. We don't need to know the exact person on the other side of our trade, we just need to know if they are a consistently profitable trader or a consistent losing trader, and the chart will give us most of this information.
Let's face it, when it comes to charting and technical analysis, most active traders use indicators. While many people including myself have often beat up the indicators, they are actually a fine tool when used properly for automated or semi-automated trading systems. The problem is that people tend to take every buy and sell signal an indicators produces and this is the last thing you want to be doing. Those who take each buy and sell signal an indicator offers are likely to lose there trading capital fast. It is not that the indicators are doing anything wrong. They will always produce what they are programmed to. The key for traders is to use them in conjunction with proper trend analysis and the proper foundation based on the laws of supply and demand. One of the benefits to using technical indicators and oscilators the right way is that they allow you to trade based on a mechanical set of rules. Let's use a single moving average and stochastics in our attempt to use indicators in our trading system to find the consistent losing trader to trade with.
On the chart is a 50 period moving average and a slow stochastic oscillator. To begin with, we must assess the trend of prices in this market. For this task, I use a 50 period moving average. Notice that the slope of the moving average is up suggesting we are in an uptrend. Once we know this, we only want to buy pullbacks in price. The mechanical signal to buy comes when the stochastic produces a buy signal in over sold territory (moving average cross, circled above). While this turned into a nice low risk buying opportunity, notice the price action just prior to this buying opportunity. During the uptrend, the stochastic was very overbought, producing sell signals during much of the uptrend which would have led to many losses had you sold short at those times. This is a trap new traders can fall into when using these tools without reality based logical rules.
Buy Rule : When the moving average is sloping upwards, take the stochastic moving average cross in oversold territory as a buy signal. When the moving average is sloping upwards, IGNORE EVERY sell signal the stochastic moving average cross in overbought territory produces.
The Reality Based Logic: When prices are moving higher, we want to find a buying opportunity when things are on sale. Most importantly, our buy signal told us objectively that someone was selling after a decline in price and selling in the context of an uptrend. This can only be the action of a novice seller. A consistently profitable trader would never sell after a decline in price and in the context of an uptrend. So, we want to buy from this novice seller.
AS you can see, this is a two part process and it's important to understand this when building your trading system. The two parts are as follows:
The "Switch": The switch is an on/off switch that says its either "ok to buy" or "ok to sell" but not both at the same time in this case. For example, when the moving average is sloping upwards, the switch is turned on that says "it's ok to buy" which means it's not ok to sell.
The "Trigger": The trigger is the actual trade entry. So, if the moving average is sloping upwards, the "switch" is turned on that says it's "ok to buy." This means that the buy signal produced by the stochastics cross in over sold territory (the trigger) is turned on. If the moving average were sloping down however, that buy signal trigger would be turned off and the sell signal trigger would be turned on.
Perhaps your trading system is not going to include indicators and instead, will focus on supply and demand levels. In this case, you would still have a "switch" and "trigger". Your switch would be price reaching the supply or demand level and your trigger would be the actual entry which may be a reversal candle at the level, price reaching the level, or one of many more triggers. Whatever the strategy, there is always a "switch" and "trigger".
On this chart, we also have a 50 period moving average and a slow stochastic oscillator. Here, the slope of the 50 period moving average tells us the trend is down. Once we know this, we only want to sell to a novice trader who is buying after a move higher in price in the context of a down trend. The mechanical signal to sell comes when the stochastic produces a sell signal in over bought territory (moving average crosses, circled above).
Sell Short Rule: When the moving average is sloping downwards, take the stochastic moving average cross in overbought territory as a sell signal. Also, when the moving average is sloping downwards, IGNORE EVERY buy signal the stochastic moving average cross in oversold territory produces.
The Reality Based Trading Logic: When prices are trending downward, we want to find a shorting opportunity when prices are high. Furthermore, we want to sell short to the buyer who is making the mistake of buying after a rally in price and in the context of a downtrend (a novice buyer).
Is this or any trading system perfect? Certainly not, there's no perfect trading system and there doesn't need to be. If there was, that person would have all the worlds' money. However, wrapping some simple trading rules and logic around your trading is the key to stacking the odds in your favor. Even Las Vegas does not win all the time, nor do they want or need to. They do well over time because they realize they don't have to always win. They just need to stick to their rules that allow them to keep the edge which means betting against people who don't have the edge.
Any Market and Indicator Will Do When You THINK the Markets Correctly.
Here is another example with the same 50 period moving average. In this example, I simply switched the Stochastic for the Commodity Channel index, better known as CCI, we will get almost the same signals.
Technical Reason for Selling Short:
1) The down slopping 50 – period moving average suggests this market is in a downtrend.
2) A CCI Overbought reading (circled are on the chart).
Logical Reason for Selling Short: Sell short to a buyer who buys AFTER a rally in price and in the context of a downtrend. The only type of mindset that would take this action is someone who makes decisions to buy and sell anything based on EMOTION, not simple and proper logic. This is the pedigree of the trader we want on the other side of our trades.
Trading strategies that work don't change with time, markets, or changing market conditions. Quite frankly, to think market conditions ever change at all is a strong illusion that can only be removed when one focuses on the foundation of price movement, pure supply and demand. The systems I see working are very simple. The example below is an intra-day chart, let's apply our same basic principles.
Technical Reason for Buying:
1) The up slopping 50 – period moving average suggests this market is in an uptrend.
2) A CCI Oversold reading (circled are on the chart).
Logical Reason for Buying: Buy from a novice seller who sells AFTER a decline in price and in the context of an uptrend.
Uptrend/Oscillator Overbought: Ignore Downtrend/Oscillator Oversold: Ignore.
Uptrend/Oscillator Oversold: Buy Signal Downtrend/Oscillator Overbought: Sell short Signal.
Turning Failure Into Success.
I see the vast majority of traders that go down the system path spend year's form-fitting indicators and oscillators and crunching numbers based on back tested hypothetical trading results (numbers). I see very few people develop trading strategies based on the simple logic of how and why price moves as it does in any market. From my reality based market experience, trading is a simple transfer of accounts from those who don't understand simple market logic into the accounts of those who do. Trading systems just expedite the process.
As I mentioned earlier, most traders who develop trading systems don't take this approach or think in the simple terms I am suggesting. Why? It is because of how most people learn about markets and trading. Most will not begin their learning path as I did by handling institutional order flow on the floor of an exchange. The vast majority of market players will start with a trading book or seminar written or delivered by someone who writes books and delivers seminars, NOT a real market speculator. These books are filled with conventional use of indicators and chart patterns that simply don't produce results. If they did, the author would certainly not be selling the book to you. This leads to a novice trader thinking they can take a trading system short cut and add a few indicators and oscillators to a price chart and let the computer find the parameters for each of those indicators that would have produced the best results in the past (back testing). Typically, when the novice system trader begins trading with real money based on those quality hypothetical results and begins losing money, they take the next wrong step, they begin adjusting indicator settings and worse yet, they add more indicators. This is a path that leads to trading disaster yet the novice system trader does not even know it. They say, "How can a trading system with such great back tested numbers not work?" It doesn't work because the system is based on number crunching and curve fitted back testing results. The reality of how markets work is ignored. When designing your trading system, make sure you bring your foundation back to the basics of how and why price moves in any and all markets. Lastly, if you want to super charge the information in this article, add supply and demand levels to your system. If you look at all the examples above, there was always a supply or demand level at the turning point. There has to be.

Build a Profitable Trading Model In 7 Easy Steps.
A trading model is a clearly defined, step-by-step rule-based structure for governing trading activities. In this article, we introduce the basic concept of trading models, explain their benefits, and provide instructions on how to build your own trading model.
The Benefits of Building a Trading Model.
Using a rule-based trading model offers many benefits:
Models are based on a set of proven rules. This helps remove human emotions from decision making. Models can be easily backtested on historical data to check their worth before taking the dive with real money. Model-based backtesting allows verification of associated costs so the trader can see profit potential more realistically. A theoretical $2 profit may look attractive, but a brokerage charge of $2.50 changes the equation. Models can be automated to send mobile alerts, pop-up messages, and charts. This can eliminate the need for manual monitoring and action. With a model, a trader can easily track 10 stocks for 50-day moving average (DMA) crossing over 15‑day moving average. Without such automation, manually tracking even one stock DMA can be difficult.
How to Build Your Own Trading Model.
To build a trading model, you do not need advanced-level trading knowledge. However, you do need an understanding of how and why prices move (for example, due to world events), where profit opportunities exist, and how to practically capitalize on opportunities. Novices and moderately experienced traders can start by becoming familiar with a few technical indicators. These offer meaningful insights to trading patterns. Understanding technical indicators will also help traders conceptualize trends and make customized strategies and alterations to their models. In this article, we will focus on trading based on technical indicators.
Example of a Simple Trading Model Strategy.
Based on the principle of trend reversal, some traders act on the assumption that what goes down will comes back up (and vice versa). Using the assumption of trend reversal as a strategy, we will build a trading model. In the steps below, we will walk through a series of steps to create a trading model and test if it is profitable.
Flowchart for Building a Trading Model.
1. Conceptualize the trading model.
In this step, the trader studies historical stock movements to identify predictive trends and create a concept. The concept may be a result of extensive data analysis or it could be a hunch based on chance observations.
For this article, we are using trend reversal to build the strategy. The initial concept is: if a stock goes down x percent compared to the previous day’s closing price, expect the trend to reverse in next few days.
From here, look at past data and ask questions to refine the concept: Is the concept true? Will this concept apply to only a few selected high-volatility stocks or will it fit any and all stocks? What is the duration of expected trend reversal (1 day, 1 week, or 1 month)? What should be set as the down level to enter a trade? What is the goal profit level?
An initial concept usually contains many unknowns. A trader needs a few deciding points or numbers to begin. These may be based on certain assumptions. For example: this strategy may apply on moderately volatile stocks having a beta value between 2 and 3. Buy if stock goes down by 3 percent and wait for next 15 days for trend reversal and expect a 4 percent return. These numbers are based on a trader’s assumptions and experience. Again, a basic understanding of technical indicators is important.
2. Identify the opportunities.
In this step, identify the right opportunities or stocks to trade. This involves verifying the concept against historical data. In the example concept, we buy on a 3 percent dip. Start by choosing high‑volatility stocks for the assessment. You can download historical data of commonly traded stocks from exchange websites or financial portals like Yahoo! Finance. Using spreadsheet formulas, calculate the percentage change from the previous day’s closing price, filter out the results matching the criteria, and observe the pattern for following days. Below is an example spreadsheet.
In this example, the stock’s closing price is going down below 3 percent on 2 days (February 4 and February 7). Careful observation of the following days will reveal if the trend reversal is visible or not. The price on February 5 shoots up to 4.59 percent change. By February 8, the change is below expected at 1.96 percent.
Are the results conclusive? No. One observation matches the expectation of the concept (4 percent and above change) while one observation does not.
Next, we need to further check our concept across more data points and more stocks. Run the test across multiple stocks with daily prices over at least 5 years. Observe which stocks give positive trend reversals within a defined duration. If the number of positive results is better than negative ones, then continue with the concept. If not, tweak the concept and retest or discard the concept completely and return to step 1.
3. Develop the trading model.
In this stage, we fine tune the trading model and introduce necessary variations based on assessment results of the concept. We continue to verify across large datasets and observe for more variations. Does the strategy outcome improve if we consider specific weekdays? For example does the stock price dipping by 3 percent on a Friday result in a cumulative 5 percent or more increase within the next week? Does the outcome improve if we take high-volatility stocks with beta values above 4?
We can verify these customizations whether or not the original concept shows positive results. You can keep exploring multiple patterns. At this stage you can also use computer programming to identify profitable trends by letting algorithms and computer programs analyze the data. Overall, the aim is to improve the positive outcomes from our strategy leading to more profitability.
Some traders get stuck in this stage, analyzing large datasets endlessly with slight variations in parameters. There is no perfect trading model. Remember to draw a line on testing and make a decision.
4. Perform a practicality study:
Our model is now looking great. It shows a positive profit for a majority of trades (for example, 70 percent wins of $2 and 30 percent losses of $1). We conclude that for every 10 trades, we can make a handsome profit of 7*$2 – 3*$1 = $11.
This stage requires a practicality study which can be based on following points:
Is the brokerage cost-per-trade leaving sufficient room for profit? I may have to make up to 20 trades of $500 each to realize a profit, but my available capital is just $8000.Does my trading model account for capital limits? How frequently can I trade? Is the model showing too frequent trades above my capital available, or too few trades keeping profits very low? Does the theoretical outcome match with necessary regulations. Does it require short selling or long dated options trade which may be banned, or holding of simultaneous buy and sell positions which may also not be allowed?
5. Go live or abandon and move to a new model.
Considering the results of the above testing, analysis, and adjustment, make a decision. Go live by investing real money using the trading model or abandon the model and start again from step 1.
Remember, once you go live with real money it is important to continue to track, analyze, and assess the result, especially in the beginning.
6. Be prepared for failures and restarts.
Trading requires constant attention and improvements to strategy. Even if your trading model has consistently made money for years, market developments can change at any time. Be prepared for failures and losses. Be open to further customizations and improvements. Be ready to trash the model and move on to a new one if you lose money and can find no more customizations.
7. Ensure risk management by building in what-if scenarios.
It may not be possible to include risk management in selected trading model depending on chosen strategies, but it is wise to have a backup plan if things don’t appear to be as expected. What if you buy the stock that went down 3 percent, but it did not show trend reversal for the next month? Should you dump that stock at a limited loss or keep holding on to that position? What should you do in the case of a corporate action like a rights issue?
Hundreds of established trading concepts exist and are growing daily with the customizations of new traders. To successfully build a trading model, the trader must have discipline, knowledge, perseverance, and fair risk assessment. One of the major challenges comes from the trader’s emotional attachment to a self-developed trading strategy. Such blind faith in the model can lead to mounting losses. Model-based trading is about emotional detachment. Dump the model if it is failing and devise a new one, even if it comes at a limited loss and time delay. Trading is about profitability, and loss aversion is in-built in the rule‑based trading models.

Forex Strategy Secrets: Build a Profitable Trading System.
A Forex trader buys or sells a currency pair. The idea is to profit from its volatility. This is why traders favor major pairs and not crosses. This represents only one of the Forex strategy secrets successful traders use. On top of that, traders search for a trading system to eliminate fear and greed.
Unfortunately, this sounds easier than it is. The first thing traders need to do is to cope with losses. Trading without taking losses doesn’t exist. The holy grail in trading doesn’t exist either.
Secondly, profitable traders strive to find a balance between life and trading. Between winners and losers. Between greed and fear. There’s nothing more frustrating than closing a trade earlier. Or letting your losses mount.
To reach this, a daily Forex strategy is not enough. Traders need to approach trading differently. To look at the market from a different angle, and to make sure the trading system works.
For this to happen, a trader must have a trading system. This may be a technical idea or a fundamental one. Or both. Regardless, a trade comes only after back-testing it. If the past can predict the future, trading results will prove that or not.
A trading system that works should consider everything. The time frame used, the spread, the target, the trading style, the slippage…everything matters here. Moreover, it should consider you as a trader. Are you an impulsive person? If yes, scalping is for you. Is patience your thing? If yes, your personality fits to swing trading and investing.
While everything about seems rubbish (who cares about this, I only want to make money asap!), it holds the key to winning and losing. To a profit and a loss. Not everyone is made to be a trader. But if you are trading material, this article is for you!
How to Build a Profitable Trading System.
Believe it or not, knowing where the market will go is not enough to make money in the Forex market. This may work from time to time, but on the long run, traders will fail. A trading system considers every aspect related to it. Market psychology is one thing. Another is knowing when to enter a market, how to avoid correlations, and so on.
Moreover, trading expectations play an important role in a trader’s success. Or, to be more exact, what is it that you look from trading?
For some, the answer is not money. Reputation, for once, might be as good an answer as any. Furthermore, the ambition to succeed. Statistically, retail traders fail over eighty percent of the times on their first deposit. As a result, they lose confidence and faith in their trading system. Beating the system is something many traders strive to do.
Probably all retail traders use technical analysis. Therefore, a Forex trading system that works for retail traders contains at least some technical indicators. Or, a trading theory, like the Elliott Waves, Gartley, Gann, and so on.
Fundamental analysis has its role, no doubt about this. But one should not focus too much on understanding everything. Focus on the basics, like the interest rates and currencies relationship, and use the economic calendar. This is just a small trick part of any Forex strategy secrets guide.
All these make up for a great trading system. There’s not one more important than another. If treated as a whole, they’ll be part of a trader’s success.
A profitable trading system is one that works. That is, it must work day in and out, month in and out. Not all trades must be winners, though. However, the profitability ratio must be positive.
The Trading Style Involved.
A profitable Forex trading system should start from the trading style. Scalpers, swing traders, and investors – these are the three trading styles to start from.
Scalpers look for a quick buck as fast as possible. They enter and exit the market multiple times a day. Because of that, scalping fits retail traders the most. Scalping may start from the lowest time frame possible (1-minute chart) and go all the way up to the daily. However, scalpers rarely look at time frames bigger than the hourly one.
A Forex scalping strategy must use the appropriate broker. While a system may work on paper or when back-testing, it may fail in a real environment. Therefore, the Forex broker type matters. Look for things like if the broker is a market maker or a non-dealing desk, what technology uses, etc.
Scalpers prefer higher commission in the detriment of super-accurate execution. In a way, it is no wonder. Most of the times, their trades take a few minutes to a couple of hours.
Swing traders like to believe they’re better. Most of the times they look at bigger time frames, above the hourly and all the way to the daily chart. They either count waves with the Elliott Waves Theory or have a pattern recognition approach. No matter the trading tool, a profitable Forex strategy for swing traders is more time-consuming.
Investors, on the other hand, don’t care about time. That is, as long as they are right about the general direction. They have both the time and resources needed to survive a small drawdown.
For these traders, Forex strategies that work deal mostly with central banks‘ monetary policy decisions. Since these decisions move a currency, this is what matters the most. Rest of the economic news is dust in the wind.
Trading Expectations with Your Strategy in Forex.
Why do traders want to trade? What attracts them to the Forex market? Is it only money? Or there’s something else to it?
No matter the answer to these questions, this is the result of human nature. People have always wanted to earn an extra buck, with little or no effort if possible. Unfortunately, this is the main reason why traders join a Forex broker.
In reality, this should be the last reason to trade. Any Forex system poised to make money will do that over the long run. If traders come to the Forex market with a $100 account and expect to turn it in a million bucks in a month, that’s not possible. In theory, it is. In reality, it’s a daydream.
The discussion should start from knowing the forces you’re facing as a trader. Retail traders represent only a small proportion (very small one!) of the whole Forex market. Other market participants move prices. Or, to be more exact, prices move because of other market participants actions.
Such participants are central banks (they do have a trading desk, to the surprise of many!), liquidity providers, Forex brokers…and so on. Commercial banks and other financial institutions come and complete the list. Not to mention here the HFT (High-Frequency Trading) industry. Imagine the Forex strategy resources these entities have access to!
Any Forex strategy that works must have a realistic approach. This starts with having realistic expectations. Imagine that trading goes like life goes: with its good and bad ones. One day you’ll have a hard time to find a good entry, but the next day it will be easier. What matters is the account to grow.
Technical Analysis in a Forex Scalping System.
It goes without saying that a successful Forex trading strategy for scalping deals with technical analysis. On the low and very low time frames, traders use technical indicators to buy or sell. Out of these, oscillators work best.
Don’t expect a straight line for your account’s balance. Look at it more in terms of the result of an ongoing activity, rather than a money-making opportunity. As a trader, you have to understand losses are part of the process. Moreover, they come naturally.
Oscillators work best for scalping for multiple reasons. Firstly, they consider multiple periods before plotting a value on the designated chart.
Secondly, their aim is to identify when the price makes a fake move. If that is the case, quick trade results. The smaller the time frame is, the sooner the reaction will be.
Many traders face a difficult problem in their trading activity. In theory, as a trader, you’re not supposed to try picking tops. Or bottoms, as a matter of fact. This is risky business.
That is on one hand. But on the other hand, if you wait for a confirmation of a top or a bottom, the new trend already started. If you trade with the Elliott Waves Theory, the market already made the first wave. By the time you enter, the market starts correcting the move. Hence, you lost the first train.
One of the best kept Forex strategy secrets when scalping is the trading size. How much is enough and how to determine the size? Here, you have to look at the leverage of your account, the maximum drawdown your trading system has, etc. Scalping Forex strategies that work must have a very small drawdown.
Technical Analysis in Swing Trading and Investing.
A trading strategy Forex traders use must be the result of a disciplined approach. Ideally, the trading systems and methods involved should result in a trade with a stop loss and a take profit. The bigger the risk-reward ratio to it, the better.
A great tool to accomplish this is the Elliott Waves Theory. According to Elliott, the market is the result of human behavior. What better way to express a market’s moves than incorporating human nature?
For this reason, this is one of the most powerful trading theories ever invented. That is, if applied correctly. So many books were written on the subject, that traders find it extremely confusing.
Yet, it gives fabulous returns due to the trading rules it has. Using it requires discipline, patience, and pending orders. Well, these are the ingredients of any trading system Forex traders want.
Elliott said that the market moves in cycles – impulses and corrections. An impulsive move is a five-wave structure and a corrective one is a three-wave structure. Together, they form a cycle.
Therefore, a bullish cycle is five waves up corrected with three waves down. Can something be easier?
The problem comes from the following aspect. Each wave in these impulsive and corrective structures is made of waves of a different degree. For this reason, the theory becomes complicated.
However, it fits to swing trading and investing. These traders use Forex strategies without indicators, and this is one of them. All they need is historical data to spot different cycles.
Based on that, a top/down analysis results in the right market positioning. This process allows Forex traders knowing where to start the count from on the lower time frames.
Fundamental Analysis Part of a Trading System.
A very simple Forex strategy that works deals with interpreting the economic data. This is where fundamental analysis kicks in. When trading, there’s a saying: the market needs a reason to move.
Without a reason, a breakout strategy Forex traders might use will simply not work. The market participants will align with the central banks’ interests. This is the only way to gain a competitive advantage in today’s markets.
However, fundamental analysis is not only about economic releases. It is about understanding what happens in the world. It is about geopolitics, as well as macroeconomics. Large investing funds “play” with vast Forex strategies resources to reach a fundamental conclusion. This may lead to the opening or closing of a trade.
The reason is as good as a technical one. Having said that, retail traders must understand the complexity of fundamental analysis. It is not about buying on a positive data and selling on a negative one. It is about understanding what is going on in an economy.
Luckily, retail traders can ignore it, to some degree. This is one of the reasons why retail trading is speculating on short to very short-term time frames.
Trading strategy examples based on fundamental analysis are at every corner. The most famous one is when George Soros “cornered” the Bank of England in a billion pounds trade. This was fundamental analysis.
Fundamental analysis works great as a Forex divergence strategy. For this, the trading system is contrarian. Such a system works more often than people think. However, while being a contrarian works, such an approach is risky.
Still on the fundamental reasons to take a trade, there are plenty of trading strategy examples that work. For instance, the classical example comes from inflation. Fundamental traders simply wait for inflation data and trade accordingly.
Keep it Simple.
Traders have a strong tendency to over complicate things. With so many technical indicators available, they look for the holy grail. In trading, this concept calls for the perfect setup: only winners, no losers.
Because of that, the strong belief is that the more indicators in a trading system, the better. Wrong!
Keep in simple and you’ll end up on the right side of the market. Sometimes all you need is to simply watch price action. This simple thing, putting the hours in front of the screens, is sometimes enough for analyzing a market.
One of the most powerful trading systems and strategies considers chart pattern recognition. Patterns repeat themselves in time. If a pattern forms on the hourly chart, the same pattern may appear on the monthly one. However, with different implications.
To keep the strategy simple, just follow the same rules from lower time frames when treating a pattern on the bigger ones. The results will end up being outstanding.
FREE GUIDE: 3 Forex Strategy Cornerstones.
And now you have the wonderful opportunity to get a Free Strategy Guide that will improve your Forex trading. At the left side of this paragraph you will find a button that will bring you to the download page of the guide. You will get an easy-to-use Forex strategy pdf that will help you take control of your trades. Get that guide and visualize your strategy options.
The guide is totally free and it is only two clicks away from you. Therefore, I strongly recommend you to support your Forex system approach by adding it to your toolbox.
Simply click the button and you will be taken to the download page of the guide. Take advantage of the free download and and get your guide now!
Conclusion.
Any profitable trading systems Forex traders use, must be discretionary. This means the results do not depend on and are not influenced by human nature. To be honest, this is wishful thinking. At least when it comes to retail traders.
Because of the way people are, it is impossible to detach completely from a trade. Or, from an idea. For example, imagine you sell the U. S. dollar. This is based on expectations the Federal Reserve will cut the rates. However, when the Fed does cut the rates, the outcome may differ.
The market will always position itself ahead of the main event. These days central banks use forward guidance. The idea is to communicate market participants as best as possible central bank’s intentions. Because of that, there are many trading strategy examples that fail to succeed.
This communication process is so powerful that by the time the decision comes, the market will ignore it. Or will move in the opposite direction, just to trip some stops.
Traders look for Forex strategy secrets to be profitable. Many come to the trading arena with huge expectations. A few months later, they end up being disappointed. How about learning some about the industry, what moves prices, how trading goes, etc.?
This way, rookie mistakes have no room in any trading system. Moreover, there’s no holy grail in trading. Success is the result of hard work and discipline. A profitable trading system starts and ends with you as a person. On top of it, with how you’re treating trading.
If you treat trading as a hobby, it will end up remaining one. If you treat it seriously, chances to survive increase. To sum up, the worse enemy to any Forex system is you, the Forex trader.
GET STARTED WITH THE FOREX TRADING ACADEMY.
Damyan is a fresh MSc International Management from the International University of Monaco. During his bachelor and master programs, Damyan has been working in the area of financial markets as a Market Analyst and Forex Writer. He is the author of thousands of educational and analytical articles for traders. When being in bachelor school, he represented his university in the National Forex Trading Competition for students in Bulgaria and got the first place among 500 other traders. He was awarded a cup and a certificate at an official ceremony in his university.
Categories.
Algorithmic Trading (1) Course: Forex Trading for Beginners (6) Course: MQL4 for Complete Beginners (48) Course: Strategy Tester for Beginners (11) FOREX (75) Forex Stategy (14) Forex Strategy (61) Forex Trading for Beginners (66) Forex VPS (1) Fundamental Analysis (2) Interviews (1) MQL4 (2) Technical Analysis (7) Uncategorized (24)
Recent post.
popular tags.
GET STARTED WITH THE FOREX TRADING ACADEMY.
Forexboat Pty Ltd (ABN: 29 609 855 414) a Corporate Authorised Representative (AR No. 001238951) of HLK Group Pty Ltd (ACN: 161 284 500) which holds an Australian Financial Services Licence (AFSL no. 435746). Any information or advice contained on this website is general in nature only and does not constitute personal or investment advice. We will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from the use of or reliance on such information. You should seek independent financial advice prior to acquiring a financial product. All securities and financial products or instruments transactions involve risks. Please remember that past performance results are not necessarily indicative of future results.
The information on this site may be accessed worldwide however it is not directed at residents in any country or jurisdiction where such distribution or use would be contrary to local law or regulation. Forexboat Pty Ltd is not registered with any US regulator including the National Futures Association (“NFA”) and Commodity Futures Trading Commission (“CFTC”) therefore products and services offered on this website is not intended for residents of the United States.

Building a profitable trading system

Elements of a Profitable Trading Strategy.
Elements of a Profitable Trading Strategy.
by Michael R. Bryant.
Trading systems or strategies use a predefined set of trading rules to generate objective buy and sell signals. While the variety of trading systems is almost limitless, most profitable trading systems have certain elements in common. Whether you build your own strategy or purchase one, trading a strategy with these characteristics will maximize your chances of success.
Most profitable trading strategies have the right level of complexity in their trading logic. These goldilocks strategies are not too simple and not too complex. The financial markets are certainly complex. An overly simple strategy is unlikely to respond adequately to the market’s complexity. On the other hand, if the strategy is overly complex, it may be over-fit to the market. An over-fit strategy is one that doesn’t generalize well to data other than that on which it was based. Complex strategies tend to be over-sensitive to changes in the market and need constant adjustment and modification.
A profitable trading strategy needs to have realistic entries and exits. For example, it’s easy in most scripting languages to specify limit orders for a trade entry. In practice, a limit order may not be filled, depending on the liquidity of the market and how many traders have orders in front of yours. Similarly, it may be possible to specify a market-on-close exit, but if the order is placed exactly at the market’s close, there will be no opportunity to fill it. The simulation results, on the other hand, may not take this into account. Also, some markets may not allow certain types of orders. If your market only allows market orders, a strategy based on stop orders may not be profitable if the strategy logic has to be converted to market orders.
Many traders focus more on trade entries than exits. However, in many cases, exits are more important. One essential element of strategy exit logic is that a profitable trading system should contain exits for both exiting at a loss and exiting at a profit. An example of exiting at a loss is a protective ( money management ) stop. A target exit, based on a limit order, is an example of exiting at a profit. Without the ability to exit a losing trade, the losses in a trading strategy are potentially unlimited. Similarly, without the ability to exit a profitable trade, it’s likely to turn into a loss.
Although it sounds obvious, an important element of a profitable trading strategy is correct coding. Certainly, if you develop a system yourself, it’s important to verify that the system code does what you intend. It’s tempting to start testing a newly code strategy for profitability as soon as the code verifies or compiles, but it’s important to check that the intended logic was properly coded first.
Another characteristic that’s required for profitability is reasonable cost assumptions. Trading costs include commissions, fees, and slippage. The latter is defined as the difference between the order price and the price at which the order is filled. A realistic amount for slippage depends on the market and the type of order. In some markets, stop orders have less slippage than market orders, whereas limit orders have zero slippage (although they may not be filled). If your trading platform has built-in logic to convert limit orders to market orders, then slippage would need to be assumed even for limit orders. Assuming too little slippage can mean the difference between a profitable system and a losing one.
In general, the most profitable systems are the most consistent ones. Demonstrating consistent profitability over a long period of time means the system works well in a variety of market conditions. Trading systems that have extended flat or drawdown periods are clearly tailored to certain types of market conditions. If those conditions don’t manifest in the future, there’s no reason to expect the strategy to be profitable. Also, the historical performance results should be based on realistic assumptions for starting equity and risk. If the stated performance is based on a much higher starting account size than you’ll have or the strategy requires taking on more risk than you can tolerate, the strategy may not be profitable for you.
Finally, profitable trading strategies have good real-time or out-of-sample results. Trading systems are typically developed using price data for one or more markets. The data over which the strategy is initially developed is referred to as the in-sample data set. Once a strategy is developed, it should always be tested on a second set of price data that was not used during development. This is called the out-of-sample data set. Only strategies that are profitable on out-of-sample data are likely to be profitable in the future. Once a strategy is deployed, it can be tracked live -- either simulated or with real money. Profitable real-time tracking results are the final arbiter of profitability.
If you'd like to be informed of new developments, news, and special offers from Adaptrade Software, please join our list. Thank you.
Copyright © 2004-2015 Adaptrade Software. All rights reserved.