This type of trading system is very appealing to some traders because it can take a lot of the emotion out of trading. If you find that you are too emotional when you are trading, then this type of trading might be for you.

A rule-based trading system has strictly defined rules for all components of a trade. A trader is not allowed to deviate from the rules. The basic rules cover: entry criteria, lot sizing, maximum trade risk, trade management, maximum portfolio risk and exit criteria. 

There are basically three types of rule-based systems:

1. 100% automated strategies
2. Manual trade management strategies
3. A mixture of both automated and manual elements (Incremental Automation)

Regardless of which one you choose to use, this guide will show you how to create a system that works for you. 

Step 1: Understand What Works With Your Personality

This is a really important step, so don't overlook it.

Many new traders think that they don't have to worry about system/personality fit because they just have to follow the rules of a system and they will make money.

Nothing could be further from the truth.

Even if you have black and white rules, you still have to consider how you will react to the results.

You could have a very profitable system, but if you cannot tolerate certain aspects of the system, you will give up on it.

Let's take a look at the primary elements that you should be aware of.

What Are Your Goals?

The first thing you should consider are your goals for the trading system. 

Do you want to multiply a small account? Or do you want to make a steady income on a larger account?

These are very important questions to ask yourself when you are getting started. 

Your answer to this question will determine the type of system you will create.

It helps to write down a yearly goal that you will be shooting for.

Some traders want to make 10,000% in a year (yes, they are serious). But in reality, 30% a year, with a decent sized account would be more than enough to meet their desires…with a lot less stress.

So take a realistic look at what you really want to get out of your trading system. 

Write down your goals in your trading plan. 

Drawdown

A lot of traders want to make the big bucks. But big profits usually also means big drawdowns.  

Can you handle that?

Some traders can.

However, in my experience, most traders can't.

So pay attention to your drawdown numbers. A 40% drawdown might not be a big deal when you are demo trading. But the psychology can change dramatically when real money is on the line.

If you have a hard time feeling the emotional impact of a drawdown in a demo account, open a small real money account and use nano lots.

You may find that you are willing to tolerate a higher or lower drawdown than you expected. That's why it's important to test different types of trading systems to find out what works best for you.

Trading Frequency

Next, it's important to understand how frequently your strategy trades and how you feel about that frequency. 

For example, let's say that your strategy only executes a few trades a month. But when it does trade, there's a high probability of success and you usually have a few big winners because you trail your stop loss.

That sounds great right?

Well, that actually sounds terrible to some traders. These traders get bored easily and want to be trading more frequently.

The opposite can also be true.

If a system executes too many trades, some traders get stressed out about having to trade all the time, or having too many trades open at once.

So take some time to consider your optimal trading frequency. 

It's not the same for everyone. 

Winning Percentage

Are you the type of trader who likes to see a high win rate? Or do you prefer to win less often, but have higher risk multiple returns per trade?

One trader I know of likes to go for 100R trades. But he only wins about 20% of the time. Could you handle 8 losing trades in a row (or more), before you get a winner?

Or would you rather only make 1R, but win 75% of the time?

Both methods are profitable.

There are no right or wrong answers here.

It's all about what you are most comfortable with.

Again, experiment with both to see what you prefer.

Fully Automated, Manual or Both?

The mechanics of how you enter and exit trades can make a big difference in your trading results.

For example, if your trading system has to be automated in order to be profitable, but you don't know how to program an automated trading strategy, then that strategy won't work for you.

But you can always learn. Take our Beginning MT4 Programming Course by master developer Adam Hartley.

Of course, you can also look for programmer to code it for you. Here's a list of programmers and a guide on how to find the right one.

On the other hand, maybe you don't trust an automated system and would prefer to manage trades yourself. If that's the case, then be sure that you will be able to trade at the times when your trades usually set up.

If your system usually has its best trades at 3:00 am local time, then that probably won't work as a manual system.

This is why backtesting and beta testing are so important. You want to figure out the blind spots in your system so you can compensate accordingly.

Step 2: Create a Written Trading Plan

The next step is to write down your trading rules.

This ensures that you have a solid reference point from which to make all of your trading decisions.

Use any recording method that works for you, but I've found that good ol' pen and paper works best for me. It's just easier to take notes and change things during the development process.

After I'm done making changes to a system, then I'll put it into Evernote.

If you want a template for your trading plan, you can download a free PDF worksheet here. I find it very useful to print out a bunch of these and leave them near my desk.

When I get an idea, I jot it down so I don't forget. Then I can come back to it later to develop the idea.

A good trading plan should have the following elements:

• Trading system name
• Version number
• Indicators used, with settings
• Entry criteria
• Trade management rules
• Risk rules
• Re-entry rules
• Rules for portfolio risk
• Will this be traded manual, fully automated, or a little of both?

There may be other elements that you want to add later, but that list is a good start.

You can get a trading plan from many sources on the internet. There's no shortage of them, you can get them from courses, forums and blog posts.

See the strategies that we've shared here.

I would also recommend checking out the MQL5 Codebase and TradingView trading strategy communities. They are a big mish-mosh of strategies, with varying levels of quality, but they can give you some good ideas.

You can also look at the code and copy/paste ideas you like. If you find a strategy that actually works, that can be a great starting point for your strategy.

But how do you know if a trading strategy will give you an advantage in the markets?

That's what backtesting is for…

Step 3: Backtest Your Trading Plan Rules

Next, it's time to test your plan so you are confident that it will work in real-world trading. If you are new to backtesting, read our free guide here.

There are different ways to backtest and the best method for you will depend on the type of strategy you have.

For example, if you have a fully automated strategy, you may consider testing in something like Forex Tester or MetaTrader 5. These are good platforms to backtest automated Forex strategies on.

If you have a manually executed strategy, Forex Tester, MetaTrader 5 or TradingView are all good platforms to test on.

Your backtesting will give you some key pieces of information:

• Drawdown
• Win rate
• Longest win streak
• Longest losing streak
• Best/worst days to trade
• Best/worst times to trade
• And more!

If a backtesting platform doesn't give you some of this data, you can always export it to a spreadsheet to figure it out.

Don't expect to hit the jackpot on the first try. A successful backtesting result is almost always the result of many, many experiments.

Successful traders make small tweaks to a strategy and test the results. Remember to only change one thing at a time and test that change.

Otherwise, you won't know which changes worked and which ones didn't.

Once you have a strategy that hits your goals, you are ready to move on.

Step 4: Beta Test Your Rules

After you have tested your strategies and are confident in the results, don't jump into live trading just yet. There's one more step to do before you start risking real moola.

This is called beta testing or forward testing.

You don't want to jump directly into live trading because there are still a few things that you may need to work out.

For example, if you have a fully automated trading strategy that runs on MT5, you should definitely test it in a demo account with the broker that you intend to trade live with.

The broker's spread or server lag may affect how your strategy trades in live conditions. Sometimes the results can be significantly different.

So run this beta test for a few months to be sure that there aren't any other hidden issues with your trading system. Once you are confident it will work as you expect, now it's time to go live!

Step 5: Go Live

Now it's time to put your system into action. I would recommend starting out with a small account or using a smaller amount of risk in the beginning.

There may still be a few unforeseen differences between your broker's live server and the demo server. 

But if it's all good, then let your strategy loose!

Remember to track your trades in a trading journal, so you can review the results every week.

Don't change anything about the system until you have at least 100 trades in the books. It can be tempting to start to mess with the system if it isn't winning right away.

Resist the urge because you may just be in a normal drawdown. You need to give the system time to apply your edge.

Final Thoughts on Rule-Based Trading Systems

A rule-based trading strategy will not take all of the emotion out of trading. For some traders, a very strict trading system can actually lead to more losses because they are not free to take all opportunities that come along.

But for traders who can be indecisive about trading decisions, or prefer to minimize the effect of their emotions, strict rules can be a great way to trade.

The added benefit of a rule based strategy is you can change specific elements of the strategy and see exactly how those changes affect the results.

The post 5 Steps to a Rule-Based Trading System That Works appeared first on Trading Heroes.

Having a written trading plan is one of the keys to success in trading.

But have you ever wondered why even the most well-thought-out trading plans fail?

Well, it's because writing down your trading plan is just the first step.

You cannot expect to write down a trading plan and have it magically make money for you.

There are some additional actions that you have to take to make a trading plan work well.

…and sometimes, you also have to know when it's time to throw everything out and start fresh.

So here are the five reasons why trading plans fail, how to tell if it is the right one for you and how you can make your current plan much more effective.  

1. It Has Not Been Properly Tested

This is pretty common…

You buy a course and learn the trading method.

Great! 

The strategy makes sense, so you write down the rules and immediately start trading it in your live trading account.

Not so great.

After trading it for a month, you lose 10% of your account and give up on the trading strategy.

This is how the Trading Silodrome starts (not a good thing).

You could have avoided this by testing your plan before trading real money.

Testing your trading plan does three things: 

1. It shows you if your strategy has positive expectancy or not.
2. It gives you confidence to execute your plan.
3. It shows you approximately what results you can expect.

To get started with testing you can read this post on backtesting.

Some trading strategies can only be forward tested and if that is the case, you can skip to this post on forward testing.

Writing down your trading plan is essential.

But once you have a plan, be sure to test it before you ever risk real money.

2. It Does Not Fit Your Personality and Lifestyle

Let's say that your t-shirt size is an extra large.

Would you wear a shirt that is a size extra small?

Of course not.

Well, at least not in public. What you do in the privacy of your own home is your own business.

My point is a trading plan that doesn't fit won't work, just like that t-shirt. 

Yet, many traders insist on trading a trading strategy that does not fit their personality and/or lifestyle.

There are basically three elements to your Trading Personality…

• Timeframe
• Trading Setups Category
• Risk Tolerance

If you do not take the time to figure these things out, then you could lose money with an otherwise great trading system. Or even worse, you could be trading a method that has almost zero chance of working for you. 

Read those posts to learn more about how to figure out your Trading Personality.

3. The Plan is Incomplete

Are there holes in your trading plan? If there are situations that you are not prepared for, then you will probably run aground when you face these situations.

…like the ship above.

You may handle these situations correctly…or you may not.

But why leave that up to chance?

Some scenarios to consider are:

• How many losses in a row should you allow before you take a break and evaluate?
• Is there a situation where you may need to break certain rules?
• When should you not trade (during news events, holidays, certain days of the week, etc.)?
• How much correlation are you willing to have in your open trades?

It's not always possible to account for every single scenario. But do your best in the beginning and keep an eye out for new ones and add them to your plan. 

Speaking of which…

4. It Does Not Evolve

Trading plans are meant to be a set of rules that you follow strictly, to make money over time.

At first glance, they seem like they should be written on marble tablets and displayed at the Louvre.

In other words, once they are written, they shouldn't be changed.

But in reality, you need to allow for a certain degree of flexibility in your plan. 

Some trading plans work well on the first try.

Others need time to evolve.

Like a fine wine, your trading plan might be pretty good in the beginning, but can only reach its true potential with age.

There are several different reasons why a trading plan may need to evolve: 

• It can become more optimized, such as improving the entry
• It may need to change with your life events (kids, retirement, new job, etc.)
• You may want to incorporate other trading concepts like pyramiding or scaling
• You want to simplify the process
• Market conditions change, so you need to tweak your strategy

When you are too rigid with your plan, you lock yourself into a paradigm that might not work in the future.

Yes, you need to have a written trading plan that works. But you must also be somewhat flexible.

Just be sure that the changes actually improve your results before you add them to your plan. 

5.  You Don't Turn it Into a Habit

Studies show that as much as 45% of our everyday behaviors are controlled by habits.

Think about that for a minute…

Almost half of things that you do during the day are a result of pre-programmed routines that have been set in the past…and not always by you.

Some of these habits have been consciously created, but most of them have not.

Many are the result of what we picked up as kids or young adults and are so deeply engrained that we do not think twice about them.

But therein lies the potential roadblocks to your success.

Habits can foil your trading plan in two ways:

1. Existing bad habits can prevent you from doing what needs to be done
2. Not forming good habits will not allow you to maximize your trading plan

If you are interested in learning how habits are formed and how to change them, I recommend reading this book. Overwriting bad habits and consciously creating new, productive habits will allow you to get the most out of your trading plan.

I would recommend journaling everything you do on a daily basis, for a week.

This will start to expose your bad habits and where you may have room to improve.

Final Thoughts on Why Trading Plans Fail

Having a written trading plan is essential to successful trading, especially if you are prone to acting impulsively.

But a trading plan alone will not make you a consistently profitable trader. 

There is much more work that you have to do in order to leverage that trading plan into a consistent track record.

If you are having trouble finding consistently, even with a great trading plan, your trading plan may not be the culprit.

Look into trading psychology next.

The post 5 Simple Reasons That Trading Plans Fail appeared first on Trading Heroes.

A trading plan is vital to your success as a trader because it gives you a set of proven rules to follow, even when your emotions are trying to make you trade impulsively. But how do you actually create a trading plan for Forex trading?

Good question.

In this post, I will show you exactly how to create a trading plan, even if you have never done it before. I've added a few additional tips after the video, so be sure to read on.

You Don't Have a Trading Plan If…

Some traders think that they can just copy a trading strategy from a forum and BOOM…they have a trading plan.

Far from it. 

You do not have a trading plan if you have ever said any of the following:

• “I trade on instinct.”
• “I look for strong trends and jump on them.”
• “I trade fundamentals.”
• “I look for trend reversals.”

Now don't get me wrong…any of these statements could have a solid trading strategy behind them. But if your entire trading strategy consists of these statements, then you are in big trouble.

So if you need a real trading plan, here's what to do next…

Write Down Your Plan

This is the biggest step to creating a trading plan…that actually helps you trade better. So many traders keep their trading system in their head, then wonder why they are indecisive and stray from their rules.

Write it down and it will always be there in black and white, for you to reference later. I prefer to start out by actually printing out the Strategy Development Worksheet because it is easier to take notes and write out 2 or 3 systems to test, at a time.

From there, then I write down the final system in Evernote.

Do whatever works best for you. If you want a ready-made worksheet, then you can download the one I use.

Strategy Name

First, give your strategy a name. This might sound a little weird, but it will help you track the development of your trading method later.

Name it whatever you want, or simply use the original name that came with the course you learned it from. The only thing that matters is that the name makes sense to you.

So feel free to get creative.  

Strategy Version

Next, you want to version every single change that you make to the original trading plan. I use version 1, 2, 3, etc., but if you want to get crazy and do 1.1, 1.2, 1.3, etc., then go for it.

This will help you isolate what is working and what isn't. Remember to change one thing at a time and change the version number with every change. 

Example

Let's say that you that you have the following parameters in your trading plan:

• 1% risk per trade
• Exponential Moving Average (10)
• Exponential Moving Average (20)
• One position, one profit target at 1R
• Stop loss on the other side of the entry candle

Then you change it to:

• 1% risk per trade
• Exponential Moving Average (10)
• Exponential Moving Average (20)
• One position, one profit target at 2R
• Stop loss on the other side of the entry candle

That is when you would change your version number. After that, you might consider changing your parameters to:

• 2% risk per trade
• Exponential Moving Average (10)
• Exponential Moving Average (20)
• One position, one profit target at 1R
• Stop loss on the other side of the entry candle

Yeah, change the version number again.

You get the idea.

Currency Pair(s)

Then you need to write down which currency pairs you have tested. Not all trading strategies will work on all currency pairs, so it's important to test one at a time.

Start with one pair. Write it down, then record the results.

Test the next pair, do the same. This process will help you understand which pairs are safe to trade and which ones you need to avoid.

Indicators Used

Now it's time to record any indicators that you will be using with your trading system. Also be sure to record the settings that you are using.

It can be easy change settings mid-testing, then not know which setting worked best. So write it down, follow the plan, and you will know exactly what is working and what isn't.

If you are doing pure Naked Trading, you can leave this section blank.

Example

• RSI (14)
• Exponential Moving Average (10)
• Exponential Moving Average (20)

Download the Worksheet

Click this button to get the PDF:

Primary Timeframe

Which timeframe have you actually tested this trading method on? Don't write down 5 minute, 1 hour and daily, if you have never tested your system on any of these timeframes.

The course you bought may have told you that a strategy will work on any timeframe, but test it yourself.

Never trust your money to hearsay. Test one time period at a time and get statistics for each one.

Entry Signal

How will you enter the trade? This can be more complex than it seems, but the more exact you can define your entry, the more consistent your results will be.

Remember to note the following rules for your entry:

• The exact conditions that will determine your entry
• Any reasons that you entry might become invalid
• External conditions to consider, such as related markets or news events
• Time of day that you should/shouldn't be trading
• If it's better to only go long or short with a certain currency pair

Once you have your entry mapped out, it's time to write down some other important parts of your trading plan.

Stop Loss

Where will you place your stop loss? Will it be above/below the current candle?

Is it a certain number of pips?

Detail your stop loss in this section and draw diagrams, if necessary.

% Risk Per Trade

This is really important. The same trading system can behave very differently when you risk different amounts per trade.

I would recommend starting off with 1% risk per trade, then test less or more risk, to see what suits you best. Remember to change your version number every time you use a different amount of risk.

Keeping your risk the same for every trade makes it much easier to handle the drawdowns and diagnose issues, when your trading isn't going as expected.

When to Take Partial Profit

If your trading plan includes taking partial profits when price starts to move your way, then note that in this section. Again, be as specific as possible.

Some common places that traders take partial profits are:

• When the trade reaches 1R or some multiple of the amount risked
• At a short-term support/resistance level
• At an indicator like a moving average

What you must avoid is setting a partial profit target based on “feel,” instead of definable rules.

When to Move Stop Loss

Do you want to move your stop loss to breakeven, to lock in a trade that is moving in your favor? This works for some traders and not for others.

But this is certainly something to consider.

When to Add to Position

Are you going to pyramid your trade by adding positions after the initial entry? This might not be your style, but if it is, be sure to note your add-on strategy here.

Be sure to clearly define exactly when you will add to your position and when you will not. Drawing a diagram usually helps.

Should You Re-Enter if Stopped Out

This can be an important rule to keep your sanity and your trading account. When you are convinced that you are right about a trade and it doesn't work out, it can be tempting to re-enter the trade again and again.

…and again.

When you limit your re-entries beforehand, you keep yourself out of trouble. I personally use the Two-Strikes Rule.

Figure out what works best for you.

Exit Signal

Now, how do you cash in your entire trade? There are many ways to take profit, but here are a few that traders use:

• Risk multiples: 1R, 2R, etc.
• Next support and resistance level
• A Fibonacci extension level
• An indicator, like the Parabolic SAR

Like with partial profits, clearly define your exit signal and don't leave it up to your “gut.”

Other Considerations

If there is anything that I missed above, put it into this section. There is always some special circumstance that traders need to have in their plan, so I made a space for it here.

This could include markets to check before you start trading and any pre-trading routines that you should go through. Yes, writing that stuff down on every test could get repetitive. But it will burn it into your brain

Test Your Trading Plan

Alright, now that you have a trading plan written down, that's just the first step…you aren't done yet! Now I'll briefly get into what you will need to do to after you have a plan.

Since these steps aren't the primary focus of this post, be sure to reference the links provided below.

Before you actually trade your kick-ass trading plan with live money, it's time to test it out in backtesting to find out what you can expect. Never trade a plan with real money, unless you know it has a good chance of working out, by testing. 

After you have backtested it, you also have to forward test it. This will show you any differences between your backtesting and live market conditions.

If your system performs as expected, only then should you move it into live trading.

Rework Your Plan (If Necessary)

A trading plan that looks promising in testing may not actually work well in real trading. This is usually because trading real money has a drastically different psychological profile, compared to trading play money.

So at this point, you may want to rework your plan to make it friendlier in live trading.

Track Your Results

Another important step after creating a trading plan is to track your results. You should start with a trading journal, like this.

But you should also have a way to get live stats on your trading. One of the easiest ways to do this is to use MyFxBook.

This will allow you to compare your testing results with your live results. 

Possible Improvements to Test

Even when you have a system that works in live trading, you aren't done with your trading strategy worksheet yet! Keep it around because you want to record any ideas that you may have for improving your trading method.

You might want to test a bigger profit target. Or you may want to test an entry on a lower timeframe.

Most traders will have some ideas on how to improve their trading system. But instead of trading the idea right away, simply write them down and go through this process again.

Conclusion

So that is how you create a trading plan. There may be other things that you want to include later, but the plan outlined above will get you started.

Test your plan and follow it. This can be hard to do, but figure out how to get yourself to stay with the program. You may want to tape your plan to your computer screen, keep a  notecard on your desk or put it on the home screen of your phone.

Happy trading!

The post How to Create a Precise Forex Trading Plan: Step-By-Step Guide appeared first on Trading Heroes.

In my search for excellent trading strategies, I keep an open mind and review as many methods as I can.  This strategy caught my eye, so I thought that I would document the testing process here on the blog.

This will be a multi part series. In this first part, I will explain the trading method and show you how to setup the forward and back test.  The second part of the series will show my results from the testing. Finally, the third part of the series will evaluate how to possibly improve on the results.

I'm not sure if this method will work or not, but that is why we test.  The great thing about this method is that it is available publicly, so I can show it to everyone and you can do your own tests.  I've tried to make this post as detailed as possible so you feel comfortable doing it yourself and so you can apply the process to other strategies that you come across.

But before we get started, here are a few things that you have to understand…

Why I Am Writing These Posts

• My goal is NOT to discredit any of these trading methods that I feature.  I'm done trying to expose scams.  I strongly believe that it is a much better use of my time to uncover excellence.  The methods I feature are strategies that I feel have a good chance of being profitable systems.
• I feel that there is a huge gap between free trading strategies that are presented on forums/blogs and what is required to figure out if the trading method is viable and if it fits a trader's personality.  I want to bridge that gap with these posts.  Instead of jumping in with real money in the beginning, these posts will show you the safe way to get started.
• To stimulate meaningful discussion from people who trade these methods with real money.
• I want to uncover the best trading methods in the world.  Deconstructing and writing about trading methods helps me understand them much better.

Keep These Things In Mind

• Of course, past performance does not guarantee future results
• I don't have any affiliation to this strategy.  The only things I know, I have read from their website.
• Backesting and demo trading is much different than trading real money
• Even if you give the exact same trading system to 10 traders, you will get 10 different results.  That is the nature of trading.
• Not all trading methods are testable.  Very discretionary systems are difficult to test and some are downright impossible.  If a trading method is more discretionary, testing might not be an accurate measure of its profit potential.
• I only test methods that are provided for free on blogs and forums.  I do not take strategies out of paid courses.
• All information is for educational purposes only.  It is not trading or investment advice.

Now that we have that out of the way, let's get down to it.

Presenting The Urban Forex CCI Divergence Breakout Strategy

The CCI Divergence Breakout Strategy is courtesy of Urban Forex.  It is a trading community created by Navin Prithyani that is based on a core set of Forex trading strategies. Their trading methods are provided for free as a lead for their Forex Watchers training website.

First, we need a plan. Here are is the testing plan for this strategy.

Testing Plan

The first thing you need is a testing plan.  Here are the parameters for my first test.  You can test on any pair or any time frame above the 15 minute (according to the Urban Forex website), but I want to provide a concrete place to start, so I have picked a specific time and pair.

• Currency Pair: EURUSD
• Indicators: Commodity Channel Index (CCI), 14 period
• Time Period: Daily
• Entry: Conservative

Entry

As the name suggests, this is a strategy that looks for divergence between price and the CCI indicator.  For a long entry, price must be trending upwards and CCI must also trend upwards, then bounce. After a CCI bounce, connect the lows in price with a trendline.  Once price breaks the trendline, wait for a retest of the trendline from the underside.  Look for a closed candle that bounces to enter the trade.

Do the opposite for a short trade.  I will provide chart examples of both long and short trades at the end of the testing plan.

Stops

The Urban Forex site says to set the stop, depending on how steep the trendline is.  The steepness of the trendline can really depend of how your chart is setup.  Since I'm not a big fan of subjective rules like this (at least not on the first test), so I'm going to set a rule that is going to use the more conservative stop.

Therefore the stop will go one pip above the nearest swing low, for a long. At the close of each candle, move the stop to one pip below the low of the last candle, for a long.

Do the opposite for a short trade.

Profit Target

Use two lots.  The longer term target for the second lot should be the next 00 or 50 level.  This should be at least a 1:1 reward to risk ratio. The first profit target should be at 1:1 reward to risk, if it is less than the 00 or 50 target.  If there is less than a 1:1 ratio on this first profit target, do  not take the trade.

Exit

If the first profit target is hit, then exit at the nearest 00 for 50. Otherwise, stay in the trade until the stop is hit.

Examples

Here is what a long trade would look like.

This is a short trade example.

How To Setup A Backtest

Since this trading method is so simple, it is easy to setup a backtest.  Open your favorite backtesting software.  I use Forex Tester, so I'll use that as the example.

If you want to see how to setup your first Forex Tester backtest, read this tutorial. Once you setup your backtest, come back to this post to see how to test this strategy specifically.

Next click on the List of indicators icon to add an indicator.

Then add the CCI indicator to the EURUSD chart.

Make sure that it is set to 14 periods.

When you see a trade setup, first calculate your stop loss.  Then make sure that your 00/50 target is at least equal to the number of pips in your stop loss. If it is not, don't take the trade. Follow the rest of the rules outlined above for each trade.

Use a risk spreadsheet to calculate the number of lots to trade.  You can create one yourself, or you can download one below for free.

If you want to create one yourself, here is the calculation.  First, figure out your maximum dollar loss, based on a percentage of your account.  For example, if you have a $5,000 account and you only want to risk 1% per trade, that would be $50 of risk.

$5,000 x 0.01 = $50

Then calculate the cost per pip, based on the lot size that you set up above.  If you are using my settings, then the cost per pip will be $0.10.

This is based on a lot size of 1,000 currency units.  If this is confusing, just follow my settings and do a test.  You will start to get a feel for the numbers.

Also compare your results in backtesting to the results in your demo account.  That will help you adjust your backtesting settings, if necessary.

Multiply your cost per pip by the number of pips of risk.  So if your stop loss is 100 pips, your total dollar risk by your cost per pip.  In this example, that means the following.

100 pips x $0.10/pip = $10 risk per lot

Then divide the total risk by the risk per lot to get the number of lots.

$50 / $10 = 5 lots

So you should trade 5 lots in this example.  That would allow you to only take 1% risk of your total account on the trade.  The calculator spreadsheet in the download section will help you do this easily or you can create one yourself.

How to Setup A Forward Test

Now do that same thing in your broker's trading platform.  Since most people use Metatrader, I'll use that as an example.  The CCI  is a default indicator in Metatrader.  Add it to the Daily chart of the pair you backtested and monitor the signals.

Next, setup a free account with MyFxBook.  This website will connect to your demo account and collect your trading results.  Follow their documentation to connect your account.

It will give you reports that tell you things about your trading results that would otherwise take a long time to do manually.  To learn how to use MyFxBook, watch this video.

Downloads

Click on the button below to download the Risk Calculator Spreadsheet and Strategy Template for backtesting.  It will make it easier for you to do your tests.

• Risk calculator spreadsheet – Calculate the proper lot size for each trade
• Backtesting worksheet – Write down your plan so you don't deviate from it.

Conclusion

Once you have everything setup, you are ready to start testing.  Keep in mind that you should test this method on as much data as possible.  The more data you have, the more likely the strategy will work in different market conditions.

So if this strategy interests you, get started right now!  Don't hesitate.  Regardless if you have backtesting software or not, everyone with a computer can start forward testing right now. Everything you need is in this post, you have no excuses.

In the next part of this series, I will show you the results of my testing.  Stay tuned to find out what happens.  If you want to subscribe to blog posts via email, you can subscribe at the bottom of this page.

If you would like to take a publicly available trading strategy from a forum or blog, test it, then write about it, feel free to contact me.  I may feature your test here on Trading Heroes.

What were your testing results? Share them in the comments below.

Disclosure: I do get a commission if you buy through some of the links on this page. But it does NOT cost you anything extra, it helps pay for my hosting costs and a portion of the proceeds go to my charity partner.

The post CCI Divergence Breakout Strategy Testing Plan – Version 1 appeared first on Trading Heroes.

When creating a Forex Trading System, it is important to develop a system that will contain all the necessary components to master the market, and earn a reasonable profit margin.

If you want to develop a successful program you should include 5 key elements, which are: an entry program, trade management, risk management, tools, and an execution plan, all of which will help you excel, and put you in a position to earn the highest profit margins possible.

Regardless of what stocks you buy, what world markets you choose to trade with, or what companies and currencies you are dealing with, these are the basics to any good trading system you develop.

This is critical if you want to succeed in Forex; it is basically a strategy that if designed properly can give you a huge edge in trading the foreign exchange markets. It will help you decide when and where to enter the trade.

You have to set your charts up properly, and find the best methods to place this entry to the market; and, although it does not have to be perfect, it has to put you in a place where you have a chance of earning high profits.

The Entry Point

The entry point can sometimes falsely be called a strategy, I say falsely because a strategy is more than an entry point and that is why this article is about the entire portion which is more accurately called a Forex trading system. One other important point about your entry position is that you will want to make it clear and easy to identify so that you do not have any confusion.

It is also easier to keep your charts clear of excess lines and indicators. It is also helpful to conduct Forex Back Testing.

Trade Management

This is the second piece of the puzzle. It basically entails how you are going to work and deal with certain trades, once you have entered the trade. You have to include this in your Forex trading system plan; you must determine exactly how each trade will be managed, to ensure you know what to do when every possible type of trading situation turns up.

It will also help you avoid making rash decisions, which can cost you in the long run. There are dozens of considerations you have to make, possibly making this the toughest part of your strategy to develop.

Some of the many inquiries you have to ask include:

• How much profit should you take?
• Where do you take profit?
• Where do you place your stop?
• Should you add, and when should you add, a hedged position?
• Which percentage level of wins (or losses) should you add?
• How often should you take partial profits?
• How much will you add?
• Should you move your stop loss to break even?
• Should you take profit early?

When you take the time to figure out all of these questions that should be asked, you are ensuring that you are making the right decisions when you trade. With a great Forex Trading System in place, you are going to have several solutions to these complex questions.

But, you must plan ahead, in order to ensure you are making the right decision, rather than simply jumping into something you did not plan for.

Risk Management

Risk Management is critical to a great Forex Trading System, and will basically answer the question:

How much are you willing to put in for any one trade?

You have to be consistent in this part of the plan. It is not as simple as choosing an arbitrary amount because there are many factors to consider. You need some consistency in the amounts you will risk, because there should be an order to your plan. And, if you are willing to risk more on certain trades you need to lay out the reasons why, such as double support zones or trend continuation areas.

You can't just say you are going to risk more, because you want to make more money. There has to be some thought out plan, and you have to put in the effort to make this work. You want to keep most of your trades at a 1:1 ratio; you can't simply risk more because you have lost money on a couple of trades, and hope to win it back on one big investment.

This might work once or twice, but over time, will prove to truly hurt your chances of succeeding in Forex.

The Tools

With any great Forex trading system, you should make use of the tools that are available (and there are plenty), to help you to succeed. Each trader is different, and therefore each system is going to call for the use of different tools. A trade platform, using a few computers, including software programs providing you signals, or even consulting a trade mentor, might all be part of the tools you will use.

Regardless of what you use, you shouldn't make it too complicated; using what is available, rather than trying to create your own tools, will truly help you, rather than put you in a position to add a burden upon you. There are many tools to use, but you have to make sure you are only using the ones that work with your set system.

A great Forex Trading System is going to guide you, and will make use of a series of tools to help you excel when trading.

The Trading Plan

The fifth, and final factor to look for in a good Forex Trading System, is the plan. This is basically going to bring everything together.

If you do not have a cohesive plan in place, all of the tools, signal software, and other programs you can purchase, are not going to mean a thing. You have to make this detailed, and you have to lay everything out on paper, in order to ensure it is something you will stick with and can follow at all times.

You must include steps, how and when to execute, the many aspects of your trading system, and any set goals you might have in mind, when you are trading on the Forex market. This has to be laid out, it is the only way you will stay on track, and is the only set of rules you will need to follow, in order to make the Forex Trading System work in your favor.

You need all of these things to ensure an effective Forex Trading System is created. Regardless of how perfect the system is, there is always a potential for loss, and you will lose some money when trading. The main thing to consider is staying on plan, following your set plan, and following this guide, so you can get back on track, and start pulling in the highest profit margins possible when you are making trades in Forex.

The post How to Create Your Own Forex Trading System appeared first on Trading Heroes.

Happy New Year, I hope you had a fun holiday!  I took some time off from writing, but I'm back.  It was good to get away for a bit to recharge and work on some projects that needed some catching up on.

Even though the new year is now staring us square in the face, we need to put resolutions OUT of our minds.  Oscar Wilde said:

“Good resolutions are simply checks that men draw on a bank where they have no account.”

What we really need is a plan.  Plans have legs, fists and a backbone.  They are the map that shows us how to get there.

But what is your plan?

That's not always an easy question to answer.  The possibilities are endless and the task of nailing down a core list of items to check off can be daunting.

But don't worry, it doesn't have to be difficult but you have to actually DO them.  Here is how to get started with your trading plan for the coming year.

What Do You Really Want?

Making a billion dollars trading is great, but what will that money actually get you?  Of course, we are not necessarily talking about a billion dollars, but whatever sum of money you want to make a year in trading.

A Lamborghini would be nice, but is that what you really want?  Maybe you just want some additional income so you can put in fewer hours at your job.  Or perhaps you want to take your family on that vacation you have been talking about for the last 5 years.  Take a moment to write that down.

What I really want my trading to provide is _______________. 

Be sure to concentrate on the feeling you will get or give other people.  For example: The togetherness your family will feel while  on vacation, the options you will have with more income or, if you must, the sheer exhilaration you will feel when you drive that new Aventador.

Good.

This might sound really kumbaya, but stick with me for a minute.

Now Step Backwards

Imagine that you already have that thing that you want and are feeling exactly how you want to feel after achieving it.  This is the key because you really want a feeling, not money.

Now tell me how you did it.  Huh?

That's right, act as if you achieved your goal and tell me exactly what you had to do to get it.  A friend showed me this exercise and I thought it was silly before, but as he talked me through, it really forced me to think through the steps of how I could have achieved that goal.

Not so silly anymore.

For Example…

OK, let's take a simple example.  Say that your first goal is to pay for your family mobile phone bill with your trading.  Everyone in your family is always stressing about going over with minutes, data and number of text messages, so you want to be able to afford a plan where everyone is free to do whatever the hell they want.

Now pretend that your trading is already paying for your phone bill every month.  What does that feel like?  You wouldn't fight with your kids/spouse about it and it would be one less thing on your mind.  Beautiful.

So how did you do it?

First, here is the maths.  To fix this problem, you need $200 per month to cover the bill (including taxes).

Now let's say that you think you could realistically make 3% a month trading.  So going back to a little basic algebra:

(Trading Capital) x .03 = $200

Therefore…

(Trading Capital) = $6,666.67

So you need about a $7,000 account, making an average of 3% a month.

This is one way that you could say that you achieved this:

“I started working odd jobs on the weekend and built up a trading account of $7,000.  In the meantime, I searched online and found a trading method that was relatively low risk and creates an average return of 3% per month.  I learned the method, backtested it and demo traded it for 6 months before I ever risked real money.  When I was finally confident in the system, I started trading and was able to cover my family's phone bill.  It feels so good not to have to worry and fight about that anymore.”

Now it becomes clear.  Your plan is:

1. Work odd jobs to build up a $7,000 trading account.
2. Find a trading method where there is documented proof that it averages about 3% a month or more (of course, past performance is not a guarantee of future results).
3. Learn the method.
4. Backtest the method.
5. Demo trade the method until you are comfortable, consistent and averaging 3% a month or more.
6. Trade the method with your $7,000 account.
7. Use the profits to pay the phone bill.

Yes, there may be months where you lose money, so be sure to have some buffers.  No guarantees in trading.

But I hope that this example gives you an idea of how to create a concrete plan and not just another worthless New Year's Resolution.

Now go take action on your plan!!

Care To Share?

What is your plan?  Feel free to leave a comment below.

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Photo: jerryonlife

The post Forget New Year’s Resolutions, This Is What You Really Need appeared first on Trading Heroes.