Forex
Currency Trading System
In the modern world, investments are
plentiful. In many countries and nations around the world,
business stock is freely traded between hands. Small business
relies on investment heavily; the easiest means of building
funds is selling shares of the company. Bigger businesses, such
as banks, create investment opportunities by offering loans to
small businesses and individuals in order to create a return on
their existing money. With the expanding horizon of investments
with no slow down in sight, the forex market is becoming
increasingly popular because of its high liquidity and 24 hour
trading environment. One of the most popular methods of
investing in this potentially lucrative market is by creating a
hard forex currency trading system to provide a strong rate of
return for your investment.
The forex currency trading system is
widely accepted as the base method of being a successful trader.
Many currency experts would agree that a forex currency trading
system with rules and a consistent return yield a greater rate
of success than emotion based gut trading alone. The forex
currency trading system may incorporate a technical chart based
set of rules, a news based set, or any combination of the two.
The only real important fact is to have a proven rate of return
in a set of rules that can be easily repeated.
The methodology behind creating a sound forex
currency trading system can go many ways. The most common in
the currency market is to build your forex currency trading system
from a technical analysis standpoint (patterns in charts and
graphs). Though news plays a very key role in movement of
currencies along one another, price action and patterns is the base
for trading in this market more than any other. When creating a
chart/pattern based forex currency trading system, many traders
usually take a sound position of logic behind the trade, and then
begin to write the rules by applying the logic to previous prices.
This is known as “backtesting”.
In the example we will be using, the logic to our
forex currency trading system relies on the price action theory; a
set trend has the tendency to continue to trend in the current
direction until something stops it’s movement and causes it to
consolidate or turn the other direction. We will attempt to create
a forex currency trading system that will get in our trade at the
first sign of a beginning trend, and get out of the trade the moment
the trend shows signs of weakness. The “indicator” we will use is
what is known as a “simple moving average”. The simple moving
average is created by the following formula:
Moving Average = (Sum of previous ‘X’ closing
prices) / X
This formula is a very simple average of the past
X number of prices (which can be changed to optimize the forex
currency trading system when testing). When this number is
calculated for every bar on your chart and the points are connected,
a very nice smoothed line appears that is essentially the average of
the last X number of bars. This will be the absolute base of your
forex currency trading system. The larger the number plugged in for
X, the smoother and straighter the line will be. By plotting two
averages, in theory, a turn around in price (or trend) will cause
the two average lines to cross, and signal a long or short trade.
Here is a picture of a 30 minute GBP/USD chart with a 10 period SMA,
and a 50 period SMA with a few signals for our forex currency
trading system, circled in white:
The yellow line is the faster 10 period SMA, and
the aqua line is our slower 50 period SMA. We now have our basis
for the beginnings of what appears to be a nice and soild forex
currency trading system. The second step at this point would be to
test our forex currency trading system with past data to see how
well our theory stacks up against semi-real market conditions. This
is most effectively done manually, but for the sake of a quick and
emotionless test, this set of rules will be coded into a MetaTrader
4 expert advisor, and automatically traded on the previous 2 years
worth of market data with an initial deposit of 10,000 USD.
It seems that our forex currency trading system
isn’t stable enough to be traded yet. Trading 0.1 lots each time,
over the passed 2 years, we would be down about 40% of our account
(with a 73+% rate of failure). Much optimization and a set of
money management rules will need to be put into place in order to
turn such a forex currency trading system profitable and worthy of
trading. Though only one type of system was outlined, the basic
methodology of creating a technical forex currency trading system
remains typically the same. Though success stories in the forex
market differ from method to method, many experts would agree that
the key to steady success in the fickle world of currency trading
would be a well developed forex currency trading system.
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