Next, we use simple moving averages to help us identify a new trend as early as possible. The RSI is an extra confirmation tool that helps us determine the strength of our trend.
After figuring out our trade setup, we then determined our risk for each trade. For this system, we are willing to risk pips on each trade. Usually, the higher the time frame, the more pips you should be willing to risk because your gains will typically be larger than if you were to trade on a smaller time frame. Next, we clearly defined our entry and exit rules.
At this point, we would begin the testing phase by starting with manual back tests. If we went back in time and looked at this chart, we would see that according to our system rules, this would be a good time to go long.
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You can see that when the moving averages cross in the opposite direction, it was a good time for us to exit. Of course, not all your trades will look this sexy. Some will look like ugly heifers, but you should always remember to stay disciplined and stick to your trading system rules. We can see that our criteria is met, as there was a moving average crossover, the Stochastic was showing downward momentum and not yet in oversold territory, and RSI was less than Now we would record our entry price, our stop loss and exit strategy, and then move the chart forward one candle at a time to see what happens.
As it turns out, the trend was pretty strong and pair dropped almost pips before another crossover was made!
Well, the truth is that it is simple. In fact, keeping it simple will give you less of a headache. The most important thing is discipline.
Well, yes we can. YOU MUST ALWAYS STICK TO YOUR TRADING SYSTEM RULES!
If you have tested your forex system thoroughly through back testing and by trading it live on a DEMO account for at least 2 months. Then you should feel confident enough to know that as long as you follow your rules, you will end up profitable in the long run.
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