What Is a Trading System in Forex? How to Use It?

What Is a Trading System in Forex? How to Use It?
Create at 1 year ago (May 25, 2023 10:31)
Many people may have heard the term "Trading System" and understood it as a program or an automated trading system using Expert Advisors (EA) or robots that can be either free or paid. However, the most important component of a trading system is the "Algorithm," which translates to "a set of rules." In the process of creating a trading system, it is essential to establish clear and well-defined "rules" or "conditions" that can be tested and statistically validated.

How  To Create a Trading System

1. Trading Algorithm

The trading algorithm involves setting conditions for entering and exiting trades. These conditions can be derived from technical knowledge, indicator usage, money management principles, or even price behavior observations. For example, observing the price movement pattern of a particular product using candlestick charts, if the previous week's candlestick was bullish, there is a likelihood of continuous price increase in the following week. Conversely, if the previous week's candlestick was bearish, there is a likelihood of a constant price decrease in the following week. Based on this price behavior observation, the following conditions can be established:

- If the candlestick in the previous week's timeframe (weekly) is bullish, open a BUY order when the market opens on Monday.
- If the candlestick in the previous week's timeframe (weekly) is bearish, open a SELL order when the market opens on Monday.
The position will be held until a change in price behavior occurs in the weekly timeframe, which means:

- Close the BUY position when the candlestick in the current week is bearish.
- Close the SELL position when the candlestick in the current week is bullish.
Closing a position can take a profit or cut a loss.
 
 
The conditions and steps explained here pertain to the algorithm, which everyone can choose any tool they are studying or have a sufficient understanding of to create conditions. Once the trading algorithm is created, it must be tested to verify if the conditions we set can be effectively used by conducting a system test.

 

2. System Test

The next step is hypothesis testing or system testing based on the conditions we have defined. In this case, we can use 'Back Test.' Anyone who can write programs can create an Expert Advisor (EA) based on the algorithm to perform Back Test. Alternatively, if programming skills are not available, Back Test can be conducted by examining historical charts and recording various statistical data on the number of profitable and losing trades, as well as the profit/loss amounts. The more extensive the backtesting is, the more accurate the results will be.
Once the Back Test is completed, it is recommended to perform a Forward Test, which involves applying the system in real markets that are currently running. This can be done using a Demo account for Forward Testing initially. If the results of the Back Test and Forward Test indicate profitability, you will have your own trading system that can be used for trading.

Conclusion

A Trading System is a methodological approach to creating one's own trading system, primarily based on technical knowledge. It may not be commonly observed in major funds. Hopefully, this article will help you better understand the definition of the term 'Trading System' and enable you to further develop your own trading system in the future.
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