Beginners Guide: Build a Profitable Trading System.

All over the web are explained the basic strategies to trade the market (Yes, in my blog as well!How to trade the markets trends in the right way“), the chart patterns, how to identify the Range Markets, the 6 tenets of the Dow Theory and so on..

It is fundamental to learn all these staffs BUT, what is not explained, is:

How to make money with all these information.

To start earning from your new knowledge you will need to build a Profitable Trading System.

In order to create your own successful strategy you will need to use the 5-W Rule:

  • Who?
  • What?
  • When?
  • Where?
  • Why?

Once you have answered all these questions, you will be ready to start trading and making money.

In this article, I will explain you the 3-steps to build a profitable trading system using the 5-W rule.

WHO and WHAT?

watch-listTo answer this question you need to define:

  • Your Watchlist. [WHO]
  • The TimeFrame you want to trade. [WHAT]

The Watchlist is the list of the pairs you are following and it’s very important to define it for 3 reasons:

  1. You will WAIT for signals instead of the look for them.
  2. You are FOCUSED only on a fixed number of currencies and, day by day, you will learn their behaviour and particularity.
  3. You can get a statistic of how your system performs on each pair and optimize it.

My Watchlist is done by 16 pairs and it includes all the crosses between Usd, Gbp, Eur, Aud, Nzd, Jpy. The TimeFrame is the Daily.

The CONDITIONS [Where and Why]

By answering the questions Where and Why you are defining the Trading Conditions.

Trading Condition is a Market Price or Situation where there is a higher probability of a trend reversal or continuation.

A few examples of a trading condition are:

  • Support and Resistance.
  • Chart Patterns.
  • A divergence on a Momentum Indicator.
  • The direction of a Long Hurst Cycle.
    (That you can spot with the 7 cyclical indicators included in the Hurst Cycles Course!)

Time your trades trend

My favourite trading condition is the direction of the trend (“Trend is your friend!”) and Support & Resistance.

The Entry Signal [WHEN]

Once you have defined your Trading Condition, in order to build a profitable trading system, you will need to define an entry signal which tells you when to open a position.

Some examples of Entry Signals are:

  • Breakout of a Support, Resistance or a Trendline.
  • A Stochastic CrossOver. (K with D).
  • The Reversal of a Short Cycle.

build-a-profitable-trading-system

In this screenshot, I’m using as condition a Cyclical Indicator with input 192 periods as condition and another Cyclical Indicator with inpu24 periods as entry signal in when this short cycle reverses in the direction of the bigger trend.

BONUS: Money Management

This third step is not included but in the 5-W Rule, but it's important exactly as the previous steps.

Before you open any position you have to know:

1) How much you want to risk.
You can choose between three methods:

  • Fixed percentage.
  • Fixed lot.
  • Another formula such as Kelly.

I strongly recommend using the Fixed Percentage method risking no more than the 5% of your equity

This is the formula:

Number of units = (Equity*%RISK)/Pips of the stopLoss/Value of pips.

2) How much you want to Earn.
This point defines where you place your take profit, the ratio between your risk and your profit is called Risk:Reward.

High Risk:Reward is the holy grail of trading. Make sure you place your take profit around, at least, twice the amount of pips of your StopLoss. (Risk:Reward > 2).

Here how the profitability of a system changes with the increase of the Risk:Reward.

The %Win of this System is 30%.

build-a-profitable-trading-system

With a Risk:Reward = 1 the profit is -60%but with a Risk:Reward = 2,5 even with a small %win as 30%, the trading system shows a profit of 45%.

Here you are the secret of a profitable trading strategy.

 

indicators-4Ready to trade the Hurst Cycles?

In the Trade Hurst Cycle Course you will find 3 trading system ready to use with:

  • Condition
  • Entry Signal
  • Money Management.

Find it HERE:
"The HURST CYCLES Course"

 

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