The system is an essential component of the plan, so these two notions doesn’t mean the same thing.

The system is the arsenal of graphical and fundamental tools that will help us decide whether and when should we place an order. Obviously, the system should be customized to your own trading style, too.

A system’s purpose is to identify new trends and help us distinguish between real and false signals. In other words, sometimes our system can signal a new trend when there is actually none. Other times we may be too reluctant, waiting too long for confirmation of the new trend and lose the opportunity or a significant part of the move. The system will help us to maintain a balance between the opportunities of the new trends and the risk of false-premise entries.

Designing a system
 

1. Discovering the timeframe we feel most comfortable with. This doesn’t mean that we’ll focus on this single timeframe. We’ll place most of our trades over this time frame, and we’ll put more emphasis on it when studying our charts: from a few minutes to hours in scalpers’ case, a few days in day-trader’s case, up to a few weeks, months or even years in position-traders’ case.

2. Finding trend reversal and continuation indicators that work the best for you. Test them on Demo! RSI, MACD and Stochastic are the most popular with traders.

3. Taking responsibility of your SL and establish clear Money Management rules.

4. Identify entry and exit points.

Entries depend on your style – if you’re the aggressive or conservative type. Exits are SL levels (we do not recommend trading without SL).
You may set a trailing stop for a certain number of pips that you are comfortable to lose. If the price moves in your favour TS will follow the price.
Also, you may set a fixed amount. Many traders use to set it right above/below resistance/support levels.

5. Testing the system and following it no matter what.

Before trying it on a Real Account you should first test your system on a Demo Account. Demo trading will help you improve and adapt it.
And then comes the most difficult part, following your system no matter what.

Let’s see a simple and efficient system type – trend trading on Daily using 2 Moving Averages – a slower SMA and a faster SMA.

• Identify the potential new trend looking for Moving Averages crossovers and confirm it using RSI.
• If both moving averages move upwards and the fast one crosses the slower one upwards while RSI is above 50 – there is a Buy opportunity.
• If the fast moving average stars decreasing and crosses the slower one downwards while RSI is at 50 again – there is a Sell opportunity.