How to create a Trading System in 6 steps

Create a good trading system It requires many hours of research and a lot of analysis. Organizing and documenting the process will help you create structure in the process of designing and developing automated or semi-automated systems.

As I was saying, testing a trading system can take many hours, especially it can take a long time to test its effectiveness. So, you must be patient, because in the long run a good trading system can make you a lot of money.

Trading systems will help us decide when to open a trade, with what volume and when to close it, to try to achieve the highest possible profitability.

What are Trading Systems

A trading system can be simply defined as a set of specific rules, or parameters, that determine the entry and exit points for buying and selling trades in financial markets such as Forex, Futures or Stocks.

In principle, the basic objective of any trading system is generate as much money as possible in the marketAfter all, that is what we want to operate for and we invest time and effort in creating a good system.

To develop your trading system, you must achieve two very important goals:

  1. The system must be able to identify the best conditions to enter the marketo (trend starts, trend changes, price corrections, etc.) as soon as possible.
  2. The system must be able to avoid, as far as possible, the least suitable conditions to enter the market. In other words, you should avoid opening positions when market conditions are unfavorable and the odds of success are poor.

If a trader can achieve those two goals with your trading system, you have much higher chances of being successful in trading. The tricky thing about these goals is that they can sometimes contradict each other.

I give two examples:

  • You have a trading system that has as its main objective to catch the trend as early as possible, then you will probably have many false signals, although you know that on valid signals you will be able to make many pips of profit.
  • On the other hand, if you decide to increase the reliability of the system and its signals by implementing one or more filters that reduce the number of false signals, you will surely have fewer losing trades (which will increase the percentage of winning trades), but you will risk entering late. in trades (losing many pips of profit) and/or missing many opportunities, some of which could have generated significant profits.

I particularly I put the operational reliability of my system first (rate of positive operations)because by having a good percentage of success in my operations (above 70%) I can allow myself to operate with a little more risk per operation (instead of 1% or 2%, for example).

How to create a Trading System in 6 steps

To trade the financial markets successfully, you need to have an advantage over the other participants. This advantage, what the Americans call “edge” will tell you when to participate and when to refrain. Create a trading system It will give you that advantage over those who do not have it.

Therefore, I am going to teach you what steps you must take into account to create your own trading system.

Step 1. Time frame of your operation

The first thing you need to decide when creating your trading system is to know what kind of trader do you want to be and how long do you want to be ahead of the market trading.

How long do you want to keep your trades open?

Answering this question will help you determine which time frame to use in your trading.

Step 2. Market choice

Each financial market usually has its own personality in the sense that it has a characteristic behavior that makes it unique. If you are going to trade indices, stocks or currency pairs, you must take this into account in your trading system..

For example, if you are going to trade currency pairs, there are currency pairs that are very active like GBP/USD or GBP/CHF and others that are more consistently trending like EUR/JPY or EUR/GBP.

Step 3. Choose the necessary technical indicators

A trader’s goal is to enter the market as soon as possible in order to take full advantage of swing prices. There are many indicators and tools available in Forexbut not all of them can offer us the market entry signal.

Many traders use the MACD, or moving averages to enter the market. To me, Personally, I don’t really like that kind of indicators. because I think they are a little late.

Step 4. System to filter entries

Once we are clear about the time frame, the currency and the indicators that we are going to use it is time to filter out those false market entry signals that could worsen our strategy.

The MACD indicator, if used correctly, I find useful in filtering out false signals. The default setting of the MACD indicator is 12,26,9. The RSI would be another indicator that could help us in this regard.

Step 5. Output Management

You can get out of an operation in three different ways. because he touched you stop loss because I touched you take profit or by a standard temporary stop.

If you trade intraday, a rule that you can apply is once a certain number of candles have elapsed since your entry, exit the trade (either positive or negative). You entered with a pattern, after a few candles it is not being fulfilled, because the best thing is that you leave and look for another entry into the market.

Remember, the trains in trading pass every day and almost at all hours, if you got on one that after a while generates doubts… get off it and look for another.

Step 6. Test the trading system on Demo account

Once we test our strategy in a demo account we can identify if it is profitable or not and we have the possibility to optimize it.

The test must not be less than 3 or 4 months for the results to be conclusive and this is so given that, in the markets, securities go through certain periods in which their behavior changes.

Profitable Trading Systems

The mathematical expectation of our Trading system is one of the previous steps that we must know before starting to operate.

Mathematical expectation trading system

We should not start any operation without knowing if the system with which we are going to operate is going to provide us with a considerable number of winning operations.which justify the losing trades that will undoubtedly occur.

Something that we must keep in mind in our trading system is the risk/benefit ratio.

Risk/benefit ratio

The risk/reward ratio helps us understand the necessary profitability of our system.

One thing to keep in mind is that a system that wins 90% of the time does not have to be a winning system. This is because if we win we do it with €10 and when we lose we do it with €150, even if we have such high reliability we will not be profitable.

However, you can find systems with risk/reward ratios below 50% and be profitable.

Automatic Trading Systems

The algorithmic trading It is trading through processes and logic, automating your trading system and executing trades with a robot.

Algorithmic trading is also called automated trading or high frequency trading. and put your trading system into practice, with the parameters that you have previously established, without you having to intervene for anything other than opening the broker.

At Traders Business School we are working on an automatic trading system with which we are getting very good results. I show you some examples.

Bearish Entry

At the red arrow, our automatic trading system marks the entry, so just on that candle, when it exceeds the wick of the previous candle, it would make the entry.

The stop loss and take profit would be placed as follows:

  • stop-loss above the wick of the candle that marks the maximum point of volatility.
  • take profit at the same pip distance as the stop loss, which would make our 1:1 entry (risk €100 to win another €100).

You have set a temporary stop after 6 candles, that is, 30 minutes. It is an output management system that we apply in this robot.

Bullish Entry

As in the previous entry, at the red arrow the automatic trading system marks the entry for us, so just on that candle, when it exceeds the wick of the previous candle, it would make the entry.

Stop loss, take profit and temporary stop would be applied in the same way, but this time the entry would be long.


  • As we have seen, creating a trading system involves writing and following rules, the more precise they are the better and, with total security, the fewer mistakes you will make.
  • We have to get involved in the development of the idea so that it makes sense to us, but we also have to test it, to find out what works.
  • In this article I have tried to give you some tips to help you create your own trading system. But like many of the Trading tips, they are rarely followed, you will see what type of trader you want to be, one of those who earn money, or those who lose it. It is in your hands.

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