A Forex Trading System and Its Components

Nowadays, the market is full of forex trading systems. However, there are very few of these that really has all the necessary components to ensure profitability in the long run.

The main objective of any forex trading system or strategy should be to guide the trader from the beginning of the trade until the actual trade is closed, preferably in a clear, step by step manner. Most of the forex trading systems on the market fail to accomplish this objective as they tend to focus on 1 or 2 components of trading only. However, a proper system should have all the key components listed below in order to assure profitability in the long term.

Initial Stop Loss

Using initial stop loss is the number 1 way to limit your risk in trading. Without this, one bad trade can erase all your winnings, or worse, it can ruin your forex trading account as a whole. Therefore, any forex trading system shall have clear description on where the initial stop should be placed.

Money Management Rules

If you read our blog you already know that forex trading is a numbers game. Once you lose, once you win. However, to stay in the game as a trader, you have to ensure that a losing streak won’t destroy your trading account. One way to ensure this is to keep a 2% money management rule at all times, which basically means that you size your position in a way that you risk only 2% of your account size. In this way if you lose 10 trades in a row you would still have more than 80% of your trading account.

Entry Signals

Every forex trading system or forex trading strategy should have at least one entry signal. An entry signal is normally giving higher probability signals when it is based on multiple confirmations. It is unfortunate that most of the forex trading systems on the market focus on this part only. They might give very good signals, but their creators tend to forget that profit is made at the end of a trade.

Exit Signals

What goes up, it must come down. This is extremely true for the forex market as currency prices highly fluctuate. Therefore, in order to make profit you need to have certain exit signals built in to your forex trading system that makes you close your trade at a specific point. This signal can be a variety of things, like a change in the behavior of the indicator(s) you use, an entry signal pointing opposite of your direction, a sudden dramatic move in your favor, or even when the price reaches your target price. However, one thing is certain about exit signals and that is the trade is closed immediately when an exit signal is triggered.    

Position Management

This component is basically the core of any forex trading system. It is about how an existing trade is being managed. After all, it is nice that you have an entry signal that allows you to enter high probability winning trades, and a couple of exit signals that allows you to close trades in profit at the end. However, forex trading is not this easy. You can’t just expect the market to reach your target and you cannot just sit there watch how your trade hits the initial stop loss level.

Therefore, any profitable forex trading system should include rules or guides concerning position management. A good position management mechanism describes how risk should be eliminated in the beginning of the trade and should show how profits are locked as the trade progresses (meaning that the trade closes with profit no matter what). This is a vital component of any forex trading system that accounts for profitability in the long run and it tends to be left out.

As some of you might know, none of the previously mentioned components are missing from the Stealth Forex Trading System™. And whether you are trader who constructs his/her own forex trading system or a trader who saves time and buys forex trading systems, you should be on the lookout for these components.