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The 4 Components of a Trading System

“Quality”, it’s all about Quality. Regular readers will have heard this phrase quite often, as Sam & I tend to repeat it very often. What exactly does “Quality” mean, when applied to trading? Why is it so hard for most retail traders to identify and wait for quality trades?

At a very essential level, there are only 2 valid explanations:

  • the trader lacks the right information;
  • the trader lacks the maturity to implement the right information.

Most traders don’t even know there are 4 components to any solid trading system:  defining a watchlist, prioritizing the watchlist in terms of quality, executing the trade, managing the trade. Let’s explore each component more in detail.

4 Components of a Trading System

You need the right information in order to reach consistency in the markets.  You need to have the 4 components of a trading system come together like a puzzle, and then repeat the process time & time again until it becomes second nature. Only then will you be able to hold your own in the market and be a specialist at what you do.

How to Define a Watchlist

Most retail traders focus only on charts. Since most retail traders don’t get very far, we suggest taking an alternative route: start with an awareness of fundamentals.   The evolution of fundamentals over time is what drives demand and supply in the FX market. Fundamental analysis is the process through which we should strive to understand how price could react to certain economic events, and whether there is a predominant psychological skew (bias) in the market that could push prices aggressively in one direction.

Although it is possible to trade the reaction to the news, it’s even more empowering to understand how to select the currency pairs or other instruments that have a strong psychological bias behind them – because it’s easier to trade something that has a chance to move in an aggressive manner. We’ve already written about how to follow the flow of themes previously, so  If you want to do things properly, check out our Forex Fundamentals Mastery Course.

How to Prioritize the Watchlist

This is really easy if you have ever paid attention to Market Types.

In the above box we have simply listed the current market type as a number, and created a heatmap. In reality anyone can do this:

  • -2 = bear fast
  • -1 = bear normal
  • 0 = range
  • +1 = bull normal
  • +2 = bull fast

It becomes quite evident that NZD and AUD are the strongest currencies at the moment, and that JPY is the weakest. How long will these ranks last? That’s not important. The important thing is having a consistent way to prioritize your watchlist and know whether something is moving well (for your system) or not.

How to Execute the Trade

This is the only component that most retail traders spend their time on – but they overcomplicate it. Trade execution needs to compliment your strategy, by finding a logical way to enter the market that offers you strong upside compared to your stop loss.

The entry is, essentially, all about timing. When the market reacts as expected, your entry should offer you very tight risk compared to the potential rewards.  We lead by example and so even if there are many ways to enter the market, we have illustrated the ones we like the most here and, of course, in our Technical Analysis Course.

Traders that do not experiment and work on perfecting their own model will have a hard time. So many traders want to simply “copy” what other people are doing. Unless you have:

  • the same degree of risk aversion
  • the same preparation
  • the same strategy

you cannot understand why the trader is trading a particular instrument at a particular time, and why the stop loss is positioned at a certain distance from entry.

Dare to be different. Invest in quality education and  learn how the markets function and how to “play the game” consistently.  For example, in the System Development Workshop, there are webinars with over 10 industry and ex-industry trades who each share their own method.

How to Manage the Trade

One you have selected and executed your trade, your job is not over. You need to manage the trade, based on your objectives and what the market throws at you.

We have written about trade management previously here, here and here.

Over to You

We lead by example. Through our Trading Signals, Training Courses and Coaching, not only do you get trades with an edge, but you also get to be exposed on a day-to-day basis to the thought processes and methods of ex-industry traders. And you get this in the context of a complete framework that teaches you all the elements of successful Forex trading – as any good trader will tell you, the actual entry is only about 10% of the equation.

If you have been obtaining scarce results in your trading, what are you waiting for?

Take action! Sam & I have got your back.

About the Author

Justin is a Forex trader and Coach. He is co-owner of www.fxrenew.com, a provider of Forex signals from ex-bank and hedge fund traders (get a free trial), or get FREE access to the Advanced Forex Course for Smart Traders. If you like his writing you can subscribe to the newsletter for free.


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