Tweaking Our Trading SystemThis week we fine-tune our trading system. Last week we added the MACD indicator to our arsenal of tools. Let's ReviewOur series on building a trading system has grown to include several components and I thought it would be a good idea to be sure we are all on the same page with regard to how our indicators are set.First we added a 21 period EMA to give us a feel for the medium term trend. We then introduced a second moving average and set it to 40 period to give us a quick reference by which to judge our 21 period EMA. Next, we plotted the RSI index to help us gauge how much the pair is over-bought or over-sold in the market. I like to set the RSI to a 13 period average as opposed to the standard 14 period. We also added the Stochastic oscillator to indicate buying or selling momentum and set it to 7,3,21. Lastly we added the MACD indicator as a confirmation signal which I like to use with Stochastic. As I point out on the Home page, successful Forex trading is a matter of using the law of probability and slightly swinging the odds in your favor. Using signals from our price charts gives us a means of analyzing the markets price action and then making a judgment call of whether or not the action is likely to continue. Setting the RulesThe past price action cannot affect future movements, but it does give us insight into how other traders may be thinking. Since prices are driven by supply and demand, knowing how other traders are reacting gives us a slight trading edge.Setting our trade rules effectively means finding the right balance between having so many indicators we never get a trade signal, and having too few so we get kicked out of most trades because we didn't see the big picture. Building a successful trading system means putting together a set of signal generators that make sense to you. If you don't have faith in your system, you will struggle greatly to make it pay profits. My SignalsThe signals I use vary sometimes and I do often use only a few of them, depending on the currency pair and the market conditions. Fast moving or volatile conditions mean you have to be flexible and adapt to changing conditions.These signals have proven to me that I can rely on them as a part of my trading system and my trades are usually based upon them. These are not in any particular order: 1) The RSI on the daily chart is above 50 if trading long, or below 50 if selling short. 2) The short term and long term EMA's are lined up to match my trade direction... shorter period above longer period if going long, or the reverse if trading short. This should be the case for both the chart you are trading and also the chart that is 4 to 5 times longer than your trading chart. 3) A good opportunity often exists when the Stochastic shorter period EMA slices across the longer period EMA. Verify this one too on the longer period chart. 4) The MACD should confirm the longer trend and not be showing divergence on its histogram with the current price action. 5) Look at the long term charts (daily, weekly, monthly) and be sure you understand which way the "big picture" trend is. That way if the price does move against you initially, it is likely to be a short term correction which can often be held until the trend resumes once again. This is possible only if you use low leverage. Try Them YourselfTry these indicators on a demo account and see if they make sense to you. If there are others you like but don't see them here, use them. Your system has to fit your style of trading.Next week I'll show you how I find entry and exit points with my system. Wishing you trading success,
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