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Chapter 31, Part II. Mechanical System Creation Framework. Page 2

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 27, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

    Aug 28, 2009
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    4. Estimate tools, that could let you get some confirmation signal.
    You have tools or indicators that show you potential trend shifting moments, but you also want to get as much confidence with that as you can. You want to check the surety of each signal somehow, because you also want to avoid failure signals and whipsaw action, or at least to minimize these. For instance you may combine some MA or two MAs crossing as indicators for trend estimation and MACD or some oscillators, say RSI or Stochastic as confirmation indicators;

    5. Assess your risk threshold. You have to define how much you are ready to lose in a single trade. This will help you to estimate stop order placement and adjust trading lot size. One thing that you should take into account is that the market needs some space to breath, so do not lock it too tightly with your stop. It is better to reduce trading lot size and place stop a bit farther. First, this will give room for the market to breath and second, you will be confident that if the market has triggered such a far stop, then probably the situation is really changing. In other words you will avoid occasional fakes and unwelcome stop outs.

    6. Define how you will enter and exit from the trade – both with profit as well as with loss. This is very important. Will you enter immediately as a signal comes, or you will wait 1-3 bars in the direction of signals, or maybe you will wait for the first retracement to enter. Or maybe you will anticipate the close price of the current bar and take as early of a signal as you can (although we do not recommend it). This depends on your trading style. The same is with your exit point – will you use just a reverse signal and reverse your position, or you will use some predefined move target, maybe fib extensions, overbought/oversold conditions – there are a lot of options here. You even can use just equal distance of moving in your favor in every trade. Also your system has to match risk criteria. For instance, if it generates, say, a Buy signal, it has to check the area where the stop loss order has to be placed and the distance to it with your loss limit. If this distance is greater, then the system should reduce lot size or skip the trade. As you can see there are a lot of nuances here…

    7. Create a flow graph. Try to pass through the system manually first.
    You have to follow to your system, and you trust it to generate the signals, that you intend to follow. That’s why it is so important to make a flow graph and understand how the system will follow and “think” according to your rules. This will help you to eliminate some obvious mistakes.
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