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FX SCHOOL (7) : Forex Systems

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Old 09-08-2009, 06:59
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Default FX SCHOOL (7) : Forex Systems

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You might be looking at the above charts in the technical / fundamental sections and be thinking, ďAnyone can make money doing thatĒ. Well, do not think itís that easy. You usually need a few reasons to make a decision to enter the market. A system helps in making those decisions.

This is the part which actually makes you think before entering a trade, i.e. before buying or selling. You donít want to just guess and hope the market goes in your direction. You have to have a plan. A system. Something that tells you, how much profit you want out of a trade, and how much risk youíre prepared to take, plus when to enter & exit, taking into consideration various factors.

A system in Forex is a potential amalgamation of different technical indicators, timeframes, fundamental analysis, and price action. In its simplest form, it can be a just a combination of 2 or 3 indicators on a single timeframe, with a simple rule to tell you when to buy and when to sell.



Here, weíll take a look at a simple system I devised to help understand how a systemís used. Itís called ďThe Super Simple System.Ē


Open up any currency chart in Metatrader (MT4). For example, EUR/USD, on the default hourly timeframe (H1)

Then on the left hand side, you'll see a box called "Navigator". Click on the tab called "Indicators", and you'll see a list of different indicators. These indicators are used to help us make decisions.

So here, we want to choose, the "Awesome Oscillator" indicator. Click and drag that onto the actual chart. You'll see it come up immediately as a separate window at the bottom of your chart.

Then we want to place two "Moving Average" (MA) indicators. Moving averages are lines you'll see on the actual chart itself. So, click and drag that onto your EUR/USD chart. You'll see a few parameters here. Click on reset (this makes everything back its default settings). Then leave everything as it is, except change the "MA Method" to "Exponential". Click OK.

Then we want another Moving Average Indicator. So again, drag and drop it on to your chart, but this time, we want to change a few things more. Firstly change the "period" to 7. Then, change the MA method to "exponential". Finally, change the color to something else, say yellow. (This will help us distinguish between the different MA lines).

This is what you should be seeing:

That's it. All your indicators are now set up. Ok, so how do we know when to enter into a long (buy) or short (sell)? Simple, you follow the system's rules. Following the rules of a system is imperative, it helps traders keep their discipline, and helps eliminate the two biggest emotional pitfalls in trading: greed and fear. Get too greedy and you'll lose any profits you might have made. Get too scared, and you might exit a trade for a loss, which could have actually ended up profitable, had you stuck to the rules.

The SSS Rules


Firstly, look for a cross of the MAs. For a buy, the yellow MA must cross above the red MA. For a sell, the yellow MA must cross past down the red MA. Secondly, look for a green Awesome indicator for a buy. And a red Awesome indicator for a sell.

Only once both of the above conditions have been met, can we enter a trade. We are not allowed to enter if the candle is still being formed. We have to wait till the end of the hour, i.e. till the candlestick has fully closed.


Place a 30 pip Take Profit (TP) and a 30 pip Stop Loss (SL). This means, if price moves in your favour by 30 pips, your trade will automatically end (with a profit). And likewise, if the price goes against you by 30 pips, your trade will automatically end (with a loss). If neither the TP nor the SL is hit, yet the Awesome has turned the opposite color, then exit. Again, wait till the candle has fully closed.

Here is an example of a couple of trades, taken on the 03/03/09:

As you can see, the first trade was only taken once the MAs had crossed upwards, AND the Awesome indicator was green. Likewise, the second trade was only taken once the MAs had crossed downwards, AND the Awesome indicator was red.

The 30TP and 30SL rule can be modified for different pairs. Some pairs are more volatile than others, and you'll realize this more as you test your trades. There is no fixed rule here, but what is fixed is that you don't change the reward/risk ratio, it should always be 1:1. I.e. whatever your TP is, then that should also be your SL.

For example, on the GBP/JPY, you may want a 50 TP and a 50 SL, since this pair moves more than most other currency pairs. Again, it's not a fixed rule, and this part of Forex Trading is what we call "discretion", where you judge what decisions to make, on which pair, and which time, based on current factors. The ability to successfully use discretion only comes with practice and ultimately, experience.

Learning and implementing a system will help you in gaining valuable experience when it comes to understanding the importance of analyzing charts, and getting more thoroughly used to actually using the different tools available in the MT4 platform to help you make those all important decisions.

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