How To Create A Forex Mechanical Trading System

Every trader is different. Still, it’s possible to unite them into categories. In particular, it’s possible to distinguish between system traders and discretionary traders. Discretionary traders rely on their judgment regarding the decision-making process. They can approach each trade differently. System traders, on the contrary, rely on mechanical trading systems for buy and sell signals and order execution in the market. This article will talk about system traders and present some of the pros and cons of trading systems.

Today's free signal is SIGNAL ALERT FX SignalWhat is a mechanical trading system?

To create a mechanical trading system, a trader has to program the rules of their trading strategy into the software mechanics. These rules should include entry execution, Stop Loss placement, trailing stop or Take Profit target, and risk management options. After a trader writes the code and tests it, the mechanical trading system will perform all the required trading tasks in real-time. In other words, it’ll automatically trade the strategy.

Traders use mechanical trading systems to solve many routine tasks related to opening and managing a trading position. In addition, automated systems can increase a trader’s productivity by running processes faster. Finally, if a trader follows the system, the mechanical system will take emotion out of trading.

How to create a trading strategy?

MetaTrader is well suited for creating mechanical Forex trading systems. The software allows traders to automate their trading strategies using a programming language. However, that doesn’t mean that you have to be an IT specialist to use this feature. You can add conditional statements to a setup and thus codify your trading method. The critical thing is that this method should have a clear set of rules that you can apply mathematically.

Different Ways to Predict the Markets

Is there an ideal trading system? A holy grail for traders? Notice that mechanical systems are based on historical data. As a result, they may not necessarily perform acceptably in the future as market conditions may change. Generally, don’t force the system to fit past events and don’t come up with special rules to accommodate history. A system based on sound general principles should give acceptable performance. You can use your system development and test software to get reliable and consistent results. You can also run the mechanical trading system on a demo account in real-time and then estimate its performance.

Types of mechanical trading systems

There are three types of mechanical trading systems depending on their time horizon. This includes the day trading timeframe, the swing trading timeframe, and the long-term position trading timeframe. Let’s look at each type in detail.

Mechanical day trading system

Day trading systems are top-rated in the futures markets, especially stock indices such as the S&P 500, NASDAQ 100, and Dow Jones 30. Due to their vast daily volume and intraday volatility, these markets are an excellent place for mechanical trading methods. An automated intraday trading system tends to hold positions from a few minutes to the end of a trading session, which can last several hours or more. Major Forex pairs also make a good fit for day trading.

Create A Forex Mechanical Trading System

When choosing market viability for intraday trading purposes, it’s important to consider market volume, average daily range, and transaction costs, which come in the form of spreads between bid and ask prices and commissions. Optimal day trading markets will offer a high level of market participation and should have sufficient volatility for a trader to take advantage of intraday price swings. In addition, spreads should be very tight, preferably with a one tick spread in most cases. This will allow you to overcome the average friction associated with trading on smaller timeframes.

Mechanical swing trading system

Different traders understand the swing trading system differently. Traditionally the swing trading method refers to holding positions from a few days to a few weeks. Swing trading systems generally provide a much better ratio of the average win to average transaction value than most day trading systems. This is because when we can hold positions for a more extended period, we get an opportunity to make more profit from trade while keeping transaction costs relatively low.

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Some traders find that switching from day trading to swing trading without initiating additional adjustments can sometimes turn a losing or breakeven system into a relatively profitable one. Automated swing trading systems are quite popular in the Forex market.

More popular swing trading pairs include EURUSD, GBPUSD, USDJPY, EURJPY, and GBPJPY. These instruments are liquid and volatile currency pairs that lend themselves well to various swing trading methods. Besides, they can often be translated into an automated Forex trading system.

Mechanical trend following system

Trend-following systems tend to work best at higher timeframes. In particular, trend-following strategies based on weekly data outperform most other timeframes. By its very nature, an automated trend-following system seeks to recognize an emerging trend, jump on board, and stay with it for as long as possible. Thus, many trend-following systems typically hold positions for weeks to months.

Mechanical trading systems based on this trend-following approach were popularized in the 1970s and 1980s by legendary traders such as Larry Williams, Bill Eckhardt, and Richard Dennis, to name a few. Trend-following systems can work well in many different sectors such as energy, metallurgy, finance, and agricultural products. They are widely used on Forex as well. As long as catalysts create an imbalance between supply and demand, those who follow the long-term trend will have opportunities to take advantage of price movements.

How to create a mechanical trading system

Your own system can be as simple or as advanced as you like. The important thing is that you can adapt it to your situation and needs. The development process should contain the following general steps:

Step 1: Choosing a timeframe

Step 2: Defining login rules

Step 3: Defining exit rules

Step 4: Backtesting

Step 1: Choosing a timeframe

First, choose a price timeframe for your system: M1, M5, M15, M30, H1, H4, or D1. It’s preferable to choose only one of these timeframes instead of trying to work your system on all of them.

As a rule, the shorter the timeframe, the lower the average profit per trade, and the greater the number of trades. You decide which timeframe is the best for you. For example, a day trading professional may trade on the 5-minute chart, but someone who can only access the trading screen once a day may prefer the daily chat.

So, let’s consider a trading strategy called “Red Dragon”. It requires the H1 timeframe.

Step 2: Defining the logic rules

There are millions of different entry rules, but all of them are divided into two large groups: trend-following rules and reversal rules.

Trend-following systems attempt to capitalize on the established trend in the market. These systems usually include trend indicators such as Moving Averages (MA) and Average Directional Index (ADX). Reversal systems, on the other hand, try to detect a change in market direction and get an advantage from it. Oscillators such as RSI and Stochastic are often used here. Compared to trend following systems, reversal systems tend to have shorter trade durations and more trades. As a result, reversal systems suit traders that are more active.

“Red Dragon” is a trend strategy. It relies primarily on EMA (Exponential Moving Average) and Parabolic SAR. The Awesome Oscillator is used as an additional indicator.

List of indicators:

  • ЕМА (14, high)
  • ЕМА (14, low)
  • Parabolic SAR (0.01, 0.2)
  • Awesome (default settings)

The rules for opening a BUY trade include:

  • The candlestick broke the upper border of the channel and closed higher.
  • The dots of Parabolic SAR are below the price.
  • Histogram of the Awesome Oscillator crossed the zero line to the upside.

How To Create A Forex Mechanical Trading SystemnewHow To Create A Forex Mechanical Trading System

How To Create A Forex Mechanical Trading System

Forex Trading signals systems can be either manual or automatic. Manual systems involve a trader sitting at the computer screen, looking for signals and interpreting whether to buy or sell. An automated trading system, on the other hand, requires a trader to instruct the software being used to look for certain signals and how they should be interpreted.

Metatrader 4 day trading signals are available for purchase on the web. An investor can obtain forex signals from specialized companies and top forex brokers, generally at a low cost, but mostly are not good. Somewhere between $50 to $100 for monthly rate. Forex Alerts | Trade signals can also be combined with fundamental analysis to give investors another weapon in their stock trading.

How To Create A Forex Mechanical Trading System