trading systems

gday all, lazy afternoon at work so thought i would write out what im trying to do at the moment with regard to creating a trading system/s to use on forex

i would appreciate any comments that you may have, positive or negative.....feel free to tell me that what i am doing wont work if you have already travelled down this path yourself (or that it does work? ha!), im sure i will find out eventually anyway..


i work fulltime (mostly, lol) so am looking to trade over longer timeframes (nothing in the minutes)....i cannot monitor trades during business hours, but can (and do) spend time in the morning and evenings analysing the market and my trades....these conditions influence my trading style to be more suited to 'swing trading' if you will, or as lighthouse puts it 'riding the rivers, not the streams'...

i am looking to create a trading system/s that can give me trading signals over this longer timeframe....i am looking to create a system that i can backtest to be confident in the historical performance.....i can then be confident in applying the system to realtime trades......at present, i have no idea as to how effective the chart patterns that i use as a discretionary trader are, and this affects my confidence in my current trading

there are two types of market conditions that will affect my system/s performance....either the market is trending (up/down) or the market is consolidating (sideways)....therefore i will need two trading systems to be an effective trader in all market conditions....note that i do not need to necessarily trade in all market conditions, but a trading system designed to identify trends is going to be useless during consolidation and vice versa.....i also need a way to be able to identify whether the market is trending or consolidating in order to choose which system to implement

identifying market conditions
to do this i will use the ADX indicator (i am also looking at using a combination of the ADX indicator and the standard deviation as a market condition identifier)......at below 20, the ADX tells me the market is consolidating.....at above 30, the ADX tells me the market is trending.....a rising ADX (eg. 17 to 23) tells me the market is going to trend......a falling ADX (eg. 33 to 27) tells me the market is going to be consolidating.....above say 45, do not enter new trades

thus we have our system filter.

trading system 1 - consolidation - oscillator based
during consolidation moving averages are useless.....however stochastic signals are stronger....therefore entries and exits will be defined by a combination of the stochastic oscillator indicating overbought/oversold and the average daily range

trading system 2 - trending - MA based
now that the market is moving, oscillators are largely useless.....however moving averages and MACD are stronger....therefore entries and exits will be defined by a combination of these

initial stops will be placed behind market structure (swing points).....the number of pips between my entry and my stop will define the risk that i am taking and will dictate my position size accordingly.....this will allow me to maintain a responsible level of risked capital....eg. my position size will change to reflect the differing risk in using a 50 pip stop as compared to a 100 pip stop

when entering a position, treat the entry as two seperate parcels.....one parcel will be sold at half of the target to remove risk from the table early in the trade.....this will result in the trade becoming breakeven using the initial stop behind market structure, however this will also reduce the reward of the trade......the effect of this strategy on an initial 1:2 risk:reward trade is that the ratio is reduced to 1:1.5.....the effect of this strategy on an initial 1:3 risk:reward trade is that the ratio is reduced to 1:2.25

note that the reduction in reward is conservative because it assumes that the second parcel is sold exactly at the target price, this will not be the case.....to enable me to 'let my winners run', the trade will continue beyond the target where possible.......this will allow me to capture the occasional big move beyond my target, hence increasing my reward


and thats all i have to say about that.. thoughts appreciated..