No single indicator will give you great results when trading any forex pair, index, crypto or commodity. You need a system that gives you an edge, which will be made up of multiple moving parts. Here we take a look at what a trading system or strategy is and what it needs to work.

Video Transcript

So let’s have a look at trading strategies and break them down into their smaller parts. A strategy is not a single indicator. You need a confluence of multiple conditions to qualify your trade entries. So you can use either a combination of different indicators or you can use a combination of indicators and levels or just pure price action and levels but there’s got to be more than one thing that is telling you to get into or get out of a trade. So all the system’s got to do, if you think about it, is give you an edge. So if you were to flip a coin and take a trade long or short, you’ve got a 50-50 chance of it going in the right direction. Your edge basically is where you get a higher risk reward for that coin flip. That makes you money long term. And ideally, you want your system or your strategy to have mechanical rules that are very easy to identify and to follow and the simpler you make your strategies i.e. the less moving parts you’ve got the better it’s going to be because the simpler a strategy is the easier it is to follow and the simpler it will be for you to trade it. These really complex strategies you see out there that have got hundreds and hundreds of different indicators and conditions, and if this line crosses that line, you can do that, but it’s got to be above this level, and this has got to agree with that.

The more there is, the more difficult it’s gonna be for you to understand it, and secondly, for you to trade it. And the other thing you’ve gotta think about is you need to be able to quickly identify these conditions. If you’re trading low timeframes, you’ve gotta be able to get into the market quickly. So you’ve got to have something that’s going to send you some kind of signal or notification to go and look at a chart. And you’ve got to then identify the conditions that that system or strategy is telling you to do.

It’s telling you to enter a trade, but you’ve got to be able to quickly see it. If you’re on M5 and you get a signal from something, by the time you look to the chart, it’s taking you 10 minutes to analyze it because you’ve got to measure things and cross this line and this, that, that, that. You know, it’s just not going to happen, is it? The other thing, you’ve got loads and loads of currency pairs out there. You’ve got to be able to monitor them all. So you need some kind of mechanical system that is going to alert you. And the easiest way to build that is to use a signal indicator to alert you to a signal condition and then you can check your charts and see if the other confluences or the other conditions for the strategy are met. Okay and that’s basically what the market reversal alerts indicator dashboard is doing is it’s just saying here looks like there’s a potential break in market structure happening go and have a look at the chart. Okay is there any other confluence there that says we should be entering our trade? So in my opinion every system or strategy out there should have five moving parts basically, a minimum of five moving parts, you can have more but there’s five core elements that a system or a strategy needs to have to make it simple to follow and as mechanical as possible so that it’s tradable.

The first part is the signal indicator and this basically tells you to get into a trade or tells you that there’s a potential trade opportunity happening. In this case we’re looking at the market reversal alerts indicator and its job is to tell you when potentially there is a shift in market structure happening and a reversal starting to kick in. So it will signal to tell you to go and look at your chart. It doesn’t mean you’re going to get into a trade. It just means that one of the conditions that is within our system has been met and the signal indicator should ideally be the easiest to automate and the last part of your strategy. If you look at any strategy, there’ll be a set of rules and one of them will be saying you’ve got to do this, one of them will be saying this has to be met as a condition and whatever they are Okay, there’ll be one final stage Which is if all of those are true then in this case when this happens You enter your trade your signal indicator should be that step Okay, the last bit that says get into the trade and what we want to automate or what we want to find and use as our signal indicator, is that last step that says, get into a trade.

And what we’re gonna do when we get that alert, is we’re gonna backward engineer our system and say, right, it says I need to get into a trade. Are the other four conditions there, or however many you’re gonna have, but in my opinion, you need another four, are they there and should I take this trade? Okay so that’s the first one the signal indicator. The second is your trend bias indicator and this shows you the direction you should be trading in. Okay so ideally you’ve heard the term many times the trend is your friend I’m sure and that is true but the trend bias indicator will be be typically something that says price is moving in this direction and it’s likely to continue to move in this direction. So these are things we looked at previously like the moving averages or you can use higher time frame moving averages ideally or you can use the market reversal alerts indicator because that will show you the previous alerts or the last alert on the higher timeframes, which gives you a trend bias or trend direction.

So we’ve got the trend bias indicator there built into the market reverse alerts indicator itself. Okay, so we’ve now got our signal indicator and we’ve got a trend bias indicator. You can use whatever you want, but you need to have some kind of idea to say, I want to take a long or a short on this particular instrument, currency pair, metal commodity, whatever it is. Okay. The third thing you need is a confirmation indicator. Now this backs up your trade idea or your signal indicator by adding a another condition.

And this confirmation indicator will be something that is being researched which increases the strike rate of the signal indicator. So, for example, if you had a signal indicator, whatever it may be, that gave you a 50% strike rate, okay, overall. So every time it said, take a trade, it was right 50% of the time, yeah? Your confirmation indicator is the indicator that increases that strike rate for you. For example, these typically tend to be something like an oscillator. So you could use something like the RSI, a stochastic, a MACD, an ATR indicator. There’s tons of them out there. There’s loads built into MT4. There’s lots of commercial indicators out there that you could look at. But your confirmation indicator, you You have tested and every time your signal indicator gave you a signal and said go long or short if your confirmation Indicator was doing this your strike rate improved from 50% to whatever 55 60 75 doesn’t matter as long as it increased That’s the job of the confirmation indicator it filters trades out, it gives you less entries but higher probability of having a successful trade. So that is your confirmation indicator.

The fourth part of your system is a level of interest. It’s very important whenever you take a trade to make sure that price is at an area where it’s likely to bounce or reverse and continue in the direction of your trade idea. Okay so this is things like support and resistance, supply and demand. Okay these are taught all over the internet and every retail trader is given the basics of how to draw support and resistance. Support and resistance is incredibly important because price does have a memory. It’s been proven over and over and again but every time you look at a chart you will see areas where price just shoots straight through areas of support and resistance. And that’s absolutely fine. It’s not going to work every time. It’s not going to hold every time. But taking a trade when it’s in the middle of a range gives you a 50-50 shot of it going up and down. Taking a trade at the top or the bottom of a range gives you a much higher probability because we know historically that price will bounce at these levels of support and resistance.

So by adding levels of interest into your trade idea you are increasing the probability of your trade working out. So that’s the fourth element, adding levels of interest. We’ll have a look at that in more detail as well. So the final part of our strategy is a target or exit indicator which tells you when to get out of your trade. Now there’s two very very simple ways you can do this. The first and most obvious is you use your signal indicator to get out when it gives you a signal in the opposite direction. Now this can be either just the signal indicator telling you that there’s a potential reversal or it’s the end of the move that you’ve got into or it could be your entire system Giving you a signal in the opposite direction Okay, so either just the signal indicator on its own or your system giving you the reversal Ie your signal indicator confirmation indicator and a level Okay, those three things in confluence with each other telling you to get out of the trade.

The other way you can get out of your trade is to use a confirmation indicator, for example the RSI that we looked at, and when the RSI gets to the opposite extreme, that is when you take your profits. So you use a confirmation indicator instead of your signal indicator to be the one that tells you to get out of the trade. And the final way of getting out of the trade is just using levels. So as we saw with our range bound example, if price moves up and it hits the opposite side of a range or a level of support and resistance or supply and demand that you have drawn in on your chart, that is potentially where price may move and then we just take our profits there. So there’s three ways you can take profits on your trades there. Very, very simple to implement, but you must have a positive risk reward on every trade that you take. So as long as you’re entering and you know where your stop is, you can see where the most logical place to take profit is likely to be and make sure that is a positive risk reward.