Summary: Creating Your Own Mechanical Trading System

There are many systems out there that work, but many forex traders lack the discipline to follow the rules and as a result, still end up losing money.

Your mechanical trading system should attempt to accomplish two goals:

1. Be able to identify a trend as early as possible.
2. Be able to find ways to avoid whipsaws (confirm your trend).

If it is profitable, then you trade your forex system live on a demo account for at least 2 months.

This will help you get an idea of how you would trade your system when the market is moving. It is a lot different trading live than manually backtesting.

Once you’ve demo traded your system for at least 2 months and you are still profitable, you are then ready to trade your system live with real money.

However, you must always remember to stick to your rules no matter what!

There are 6 steps to developing your mechanical forex trading system:

1. Find your time frame.
2. Find indicators to help you identify trends early.
3. Find indicators to help you avoid whipsaws and confirm your trend.
4. Define your risk.
5. Define your entry and exit.
6. Write your forex trading system rules down and ALWAYS stick to those rules!

There are 3 phases to testing your system:

First Phase: Go back and time and move your chart forward one candle at a time.

Trade your system according to its rules and record your trades to see if it ends up being profitable. This is called backtesting.

Second Phase: If it is profitable, then you trade your system live on a demo account for at least 2 months.

This will help you get an idea of how you would trade your system when the market is moving. It is a lot different trading live than manually backtesting.

Third Phase: Once you’ve demo traded your system for at least 2 months and you are still profitable, you are then ready to trade your system live with real money.

However, you must always remember to stick to your rules no matter what!

Okay now legal stuff our lawyers asked us to add:

HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR ADHERE TO A PARTICULAR FOREX TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.

Reprinted from Babypips, the copyright all reserved by the original author.