I’ve come up with a draft for my first trading system. Does this look like it’s in the ball park or do I need to do some more work? I’ve not backtested it, because I’m not sure how to do that properly. I’ll be using this on a demo account if it sounds like it’ll work.
Market and Timeframe
Markets: All the 28 Major currency pairs.
Timeframe: Use daily (D1) charts to identify major trends and 4-hour (H4) charts to find entry and exit points.
Tools and Indicators
Trend Indicators: 50-day and 200-day moving averages to identify major trends.
Momentum Indicators: RSI (14) to identify overbought/oversold conditions.
Support and Resistance: Identify and mark key support and resistance levels.
Trend Confirmation: Only trade in the direction of the major trend (uptrend or downtrend) identified using the 50-day and 200-day moving averages.
Support and Resistance: Wait for the price to approach an identified support or resistance level.
RSI: Confirm the entry with RSI. Buy when RSI is below 30 (oversold) at support in an uptrend. Sell/short when RSI is above 70 (overbought) at resistance in a downtrend.
Candlestick Confirmation: Look for confirming candlestick patterns at support or resistance.
Exit Strategy
Take-Profit: Set take-profit at the next major resistance level in an uptrend or the next support level in a downtrend. Alternatively, use a risk-reward ratio of at least 1:2.
Stop-Loss: Place stop-loss slightly below the support level for buy positions or slightly above the resistance level for sell positions to protect your capital.
Risk Management
Risk per Trade: The risk should not exceed 1% of your total trading capital per trade.
Position Size: Calculate position size based on the distance to stop-loss and the total risk per trade.
Diversification: Avoid having too many open positions that are correlated to spread the risk.
Continuous Evaluation
Trading Journal: Keep a detailed trading journal to record all trades, including entry and exit points, reasons, outcome, and lessons learned.
Weekly and Monthly Review: Review your trading journal weekly and monthly to identify patterns, evaluate strategy performance, and adjust your approach based on insights gained.
Example Trading Setup
Uptrend Scenario:
Trend Identification: 50-day SMA is above 200-day SMA.
Price Near Support: Price is approaching an identified support level.
RSI Confirmation: RSI is below 30 (oversold).
Candlestick Confirmation: Look for a bullish pattern (e.g., Hammer).
Entry: Buy on confirmation of a bullish candlestick pattern.
Stop-Loss: Placed slightly below the support level.
Take-Profit: Set at the next resistance level or based on a risk-reward ratio of 1:1.
Downtrend Scenario:
Trend Identification: 50-day SMA is below 200-day SMA.
Price Near Resistance: Price is approaching an identified resistance level.
RSI Confirmation: RSI is above 70 (overbought).
Candlestick Confirmation: Look for a bearish pattern (e.g., Bearish Engulfing).
Entry: Sell on confirmation of a bearish candlestick pattern.
Stop-Loss: Placed slightly above the resistance level.
Take-Profit: Set at the next support level or based on a risk-reward ratio of 1:1…
How you want to do backtest if your strategy is discretionary in a couple parts? Of course, you can do the backtest manually but in my opinion you will achieve different results.
My backtesting skills are virtually zero. I wrote it merely to inform that I’m not even sure my plan is viable or will work. Could have written that better I see in hindsight… Would you suggest I just practice this on a demo? I always read backtest, backtest, backtest, and just assume everyone is backtesting their own strategies.
First, I think that, as momentum indicators go, RSI isn’t a bad one at all, but (if using it) I wouldn’t dream of buying when it’s under 30 or selling when it’s over 70. As with all indicators of this type, I think whether they’re rising or falling is actually much more helpful than their numerical levels, but in spite of that I’d normally be taking “above 50 and rising” as a sign to be looking at the price action for potential long entries and “below 50 and falling” as a sign to be looking at the price action for potential short entries.
Secondly (related), I think “overbought” and “oversold” are absolutely nonsensical concepts, totally misguided, based on a significant and very widespread misunderstanding, and barely applicable at all to spot forex CFDs.
Thirdly, I think that at least 90% and maybe 95% of people trading for a living would agree with the two points above (but they’ll still both be small minority viewpoints here).
I understand. Remember that there’s overwhelmingly more misinformation than information, online, about trading.
And that in a field with such extremely low overall success-rates as forex trading, it stands to reason that the generally available consensuses of opinion about many issues are very likely to be misguided and mistaken.
And that a lot of readily available “information” has been made readily available because someone is either trying to sell or promote something (even if it’s only their own credibility) or because it’s what someone wants you to believe for some other questionable reason that’s not typically in your own interest.
I love the strategy. I think that will pay off. for testing, I suggest you try a demo account for a number of trades in a while. Also the 1:1 R/R does not look fine, try 1:1.5 at least I think.
Mechanical strategies are defined parameters from the beginning for example tp = 100 pips sl = 50 pips and so on. Your strategy has many discretionary parameters which you don’t know, how to evaluate.
Years ago I used price action, that’s why I know possible dangers bound with using price action. You, mag and other users doesn’t have to listen to me, it is your choice. You decide.
I guess we’re all individuals going at this from different perspectives, and coming from lives full of different experiences that have shaped us into who we are. I believe this will shape how we interact with trading. I’ve come to believe that price action is the right path for me to take. That doesn’t exclude that there are other ways that are viable. So I’m cheering for everyone who has the courage to take steps on this journey and wish that we all end up in a place where we want to be
I think this is well judged and will set the odds far less against you than those experienced by the majority of aspiring traders.
I respectfully advise the opposite: use a maximum of 1:1. I believe that almost no retail trader is profitable over the long term using a higher reward-to-risk ratio than 1.0, and that 1:1.5 would be a mistake.
There are reasons why contrary to what you read in beginners’ forums where misinformation and bad advice are constantly regurgitated, in professional trading circles (with “active trading”, i.e. excluding long-term positions), something between 0.6:1 and 0.8:1 is considered a “normal” R:R to the point of actually being not far off universal.
My suggestion: don’t take anyone’s word for it: test both for yourself, remembering that in a field with such extremely low overall success-rates as forex trading, it stands to reason that the widely believed consensus of opinion about such issues is very likely to be a mistaken one.
Yes, this is a good plan. Go ahead with it on a demo account. Risk management. Another variant proposed here. Instead of basing the position size on distance to stop loss (being derived from distance to “slightly below the S/R lines, itself arbitrary”, unless you quantify what slightly means, look at the ATR (14 periods) and set the stop loss as 1.5 times ATR. That will give your trade time to breathe.
About how to backtest, it is a good idea to do manual backtesting for a few hours. Backtest on only one currency pair only to start with (eg EUR/USD or GDP/USD). First identify over a long period, how many opportunities there are that satisfy your set up and entry criteria. It may be once per day or once per year. It is important that you “feel” that frequency before you make more complicated back tests. No point in looking for a perfect set up that occurs once per year and then risk $10 to make $15. That will not pay your laptop electricity bill It is important to try often, fail fast, fail often and adjust your plan accordingly. Best of luck with it. I look forward to seeing some quick and not so complicated back test results.
I think different people do it in different ways, Merry. The four main approaches that spring to my mind (only two of which I’ve used, myself) are:-
You can use software like “ForexTester” which can backtest multiple approaches of things like this, in detail, over a decade’s data, in only a few minutes, and even if the outcomes aren’t quite 100% reliable, they’re still hugely useful for easily deciding what’s in principle worth spending more time, effort and energy examining in more detail (there’s other software like that, too: I’m just mentioning that specific package because I’ve used one of its earlier versions a lot, myself, and on the basis of my own experience I feel I can strongly recommend it)
You can use the backtesting facilities (“market replay” etc.) built in to many decent trading platforms, these days (I haven’t done this, myself, but many people do)
You can pay someone who does this kind of thing for a living to do it for you; the skill-set requirement is pretty low, competition is high, availability is easy, so the cost is very low (I haven’t done this, either)
You can rely on independent, objective, academic, second-hand information on the subject (this isn’t a bad way at all, actually, for people who know how to judge accurately what’s truly independent, objective and reliable information; naturally, it involves avoiding most readily accessible online “information”, which tends not to be!).
