So far, we’ve taught you how to develop your trading plan. We’ve also discussed how important it is for you to discover which type of trader you are.
Next, we’re gonna teach you how to add some meat to your thin trading plan frame by showing you how to create a trading system.
More specifically, we’re gonna teach you all about mechanical trading systems.
Mechanical trading systems are systems that generates trade signals for a trader to take. They are called mechanical because a trader will take the trade regardless of what is happening in the markets.
In theory, this should eliminate all biases and emotions in your trading, because you are supposed to follow the rules of your system NO MATTER WHAT.
If you do a simple search in Google for “forex trading systems” you’ll find many many many people out there who claim to have the “Holy Grail” system that you can purchase for “only” a few thousand dollars.
These systems supposedly make thousands of pips a week and never lose. They will show you supposed “results” of their perfect systems and it will make your eyeballs turn into dollar signs as you sit there and say to yourself, “Wow I can make all this money if I just give this guy $3,000. Besides, if his system making thousands of pips a week, I’ll be able to make my money back in no time.”
Slowww down cowboy. There are some things you should know before you give them your credit card number and make that impulse buy.
The truth is that many of these systems DO in fact work. The problem is that traders lack the discipline to follow the rules that go along with the system.
The second truth (Is there such thing as a second truth?) is that instead of paying thousands of dollars on a system, you can actually spend your time developing your own system for free, and use that money you were going to spend as capital for your trading account.
The third truth is that creating systems isn’t that difficult. What is difficult is following the rules that you set when you do develop your system.
There are many articles that sell systems, but we haven’t seen any that teach you how to create your own system.
This lesson will guide you through the steps you need to take to develop a system that is right for you. At the end of the lesson, we will give you an example of a system that one of the FX-Men uses just so we can show you how awesome we are! (Insert evil laugh here.)
Goals of your trading system
We know you’re saying, “DUH, the goal of my trading system is to make a billion dollars!”
While that is a wonderful goal, it’s not exactly the kind of goal that will make you a successful trader.
When developing your system, you want to achieve 2 very important goals:
- Your system should be able to identify trends as early as possible.
- Your system should be able to avoid you from whipsaws.
If you can accomplish those two goals with your trading system, you have a much better chance of being successful.
The hard part about those goals is that they contradict each other.
If you have a system who’s primary goals is to catch trends early, then you will probably get faked out many times.
On the other hand, if you have a system that focuses on avoiding whipsaws, then you will be late on many trades and will also probably miss out on a lot of trades.
Your task, when developing your mechanical system, is to find a compromise between the two goals. Find a way to identify trends early, but also find ways that will help you distinguish the fake signals from the real ones.
If you have no idea where to start, drop by our Free Forex Trading Systems thread in our forums. Tons of traders post their ideas for trading systems, so you may find one or two that you can use when you build your own system.